Slow news day at the Fed
You know the Federal Reserve policy statement had little that was newsworthy when the most notable change was very technical, and really not a policy item. The statement from the Federal Open Market Committee surprised no one by leaving the target range of the federal funds rate unchanged at 2.25%-2.5%. The statement noted that the domestic economy remains “strong,” presumably acknowledging the strong first-quarter GDP growth rate of 3.2%. In particular, the Fed singled out strength in the labor market. In his press conference, Chair Powell said tail risks to growth have diminished in recent weeks as financial conditions have improved, prospects for a hard Brexit have fallen and China and Europe are showing improvement.
If the statement didn’t spend much time discussing inflation, other than to downgrade its outlook, (consistent with the recent decline in core PCE to 1.6%), Powell did. Most interestingly was his comment that the Fed thinks “transitory factors” have depressed recent inflation readings. He again noted the importance of inflation remaining symmetrically around 2% for a sustained period of time in order to anchor expectations at that point, perhaps giving additional credence that the Fed may indeed move to a price-targeting regime down the road.
That technical note? It was that the Fed trimmed the rate it pays on excess reserves by 5 basis points to 2.35%. But that adjustment does not signal a policy change and was done because the effective fed funds rate had been trading above the midpoint of the Fed’s target range.
Overall, the Fed hewed to its “rates on hold” theme. That caused Treasury yields to rise modestly and stocks to give back earlier gains as the market was hoping for some hint the Fed was considering an “insurance cut” to help sustain the economic expansion and nudge inflation higher.