U.S. FOMC Statement

Fed leaves rates unchanged in May, notes deceleration in inflation  

• As expected, the Federal Open Market Committee (FOMC) unanimously decided to maintain the target range for the fed funds rate at 2.25-2.50%. 
• The commentary on recent economic performance was updated to reflect the "solid rate" of expansion in the first quarter, but also to highlight the realized slowdown in household and business spending.
• The statement recognized the decline in inflation and also that both headline and core measures are "running below two percent". Other than these updated paragraphs, the statement was unchanged from March.
• The interest rate on excess reserve balances was lowered by 5 basis points to 2.35%.The implementation note commented that this "is intended to foster trading in the federal funds market at rates well within the FOMC's target range".

Key Implications

• There was little new in this statement. The recognition of inflation running below target emphasizes its importance in driving the FOMC's interest rate decisions. 
• Until inflation shows convincing signs of moving higher, the Federal Reserve will not raise interest rates. By the same token, inflation would have to move convincingly lower for the Fed to ease policy. As long as economic growth continues and the labour market remains healthy, this appears unlikely.
• We continue to expect the Fed to remain on hold through this year and next. Inflation is more likely to move higher than lower over this time period. But, with economic growth slowing toward potential, there appears to be little risk of it overshooting and warranting a tighter policy stance.

Disclaimer

This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.