U.S. FOMC Meeting (April 30 - May 1, 2024))

James Orlando, CFA, Director & Senior Economist | 416-413-3180  

Date Published: May 1, 2024

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Fed holds rates, changes the pace of QT 

  • The Federal Reserve Open Market Committee (FOMC) maintained the federal funds rate in the 5.25% to 5.50% range but announced a slowing of the pace of Quantitative Tightening (QT). Beginning in June, the runoff cap for Treasury securities is reduced to $25 billion per month, from $60 billion. The mortgage-backed securities runoff cap remains at $35 billon. 
  • The Fed adjusted its language a touch to acknowledge the continued strength in economic data, stating "recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have remained strong, and the unemployment rate has remained low."  
  • Importantly, given the upturn in inflation, the Fed noted, "in recent months, there has been a lack of further progress toward the Committee's 2 percent inflation objective."
  • On the future path of policy, the statement repeated that "the Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent."
  • All of the members of the FOMC voted in favor of the decision.

Key Implications

  • The rebound in inflation has pushed out rate cut expectations for 2024. Services inflation is running hot and the deflationary impulse on the goods side from easing supply chains has diminished. This is why the Fed was more hawkish regarding the progress on inflation, signaling an intent to wait longer to ensure that inflation will sustainably move to the 2% target. 
  • For the Fed to gain confidence, it needs the economy to show some signs of cooling. But with consumer spending running at a 2.5% quarter-on-quarter annualized pace, there is little evidence that demand-driven inflation will ease soon. This has markets currently fully priced for just one 25 basis point rate cut in 2024, expected in December. That is a huge shift from the 150 basis points of cuts that was expected just a few months ago. This has pushed up Treasury yields by nearly 1 percentage point from this year's lows. Any further hawkish comments from the Fed could continue this trend and push yields up towards 2023 highs. 
  • We do not view the change to the Fed's Quantitative Tightening policy as a dovish tilt. Rather, the Fed is moving more slowly with QT to ensure it doesn't overstep and create volatility in the Treasury market like it did in 2019.