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United States Monetary Policy May 2019

United States: Fed indicates no urge to change rates in May; Powell signals mild concerns over low inflation

At its 30 April–1 May monetary policy meeting, the Federal Reserve’s Open Market Committee (FOMC) unanimously voted to maintain its target range for the federal funds rate at 2.25%–2.50%. The decision came as no surprise given the institution confirmed it planned no more rate hikes this year during its March meeting.

In its latest communiqué, the Fed pointed out that, although the Q1 GDP print was robust overall, “growth of household spending and business fixed investment slowed in the first quarter”. In addition, the Bank noted that both headline inflation and core inflation have been tracking below the 2.0% target in recent months, while inflation expectations remain well anchored. This signals some level of concern that inflation could stay under the Fed’s 2% objective for an extended period of time.

Meanwhile, Fed Chairman Jerome Powell struck a relatively optimistic tone during the post-meeting press conference, expressing confidence that inflation would increase over the medium-term as transitory factors subside. Furthermore, he noted that “we think our policy stance is appropriate at the moment; we don’t see a strong case for moving it in either direction”, ruling out an interest rate cut in the near future. This settled markets, which had started to price in a rate cut this year. It also reaffirmed the Fed’s policy independence in the face of criticism from President Trump, who has called for a rate cut and attempted to appoint political allies to the Fed’s Board of Governors.

Overall, our panelists saw the May policy meeting as an affirmation that the Fed would remain on hold throughout this year. Analysts at Goldman Sachs, for instance, noted that “today’s meeting further reduced the odds of a rate cut in response to low inflation, which we already saw as quite unlikely”. Meanwhile, Nomura researchers added that “at a minimum, the inflation language today suggests that the Committee is not close to cutting rates anytime soon because of disinflation risks”, and consequently “continue to expect no policy rate changes through end-2020”.

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