United States Monetary Policy May 2017

United States

United States: Fed stands pat in May as it downplays soft economic data

May 3, 2017

The Federal Reserve’s Open Market Committee (FOMC) decided to leave the Federal Funds rate target at a range of between 0.75% and 1.00% at its third monetary policy meeting of the year, held on 2-3 May. The decision was broadly in line with market expectations and the statement brought little in terms of new insight, with officials largely attributing soft data in Q1 to transitory factors and making no mention of the prospect of unwinding the Fed’s balance sheet.

The Fed noted in its post-meeting statement that economic activity had lost some steam in Q1, with a weak first-quarter GDP print and a sharp deceleration in non-farm payrolls growth in March weighing on economic momentum. Nonetheless, the U.S. Central Bank signaled that it expects this downturn to be temporary, driven by a mild winter and a downswing in inventory investment. Consistent with that view, the Fed showed little inclination to alter its intentions to raise rates in the near future. According to the FocusEconomics panel, the likelihood for an interest rate hike at the next meeting in June is 58%.

The Fed reiterated its accommodative stance and maintained its expectations that inflation will gradually converge to its 2.0% target over the medium term. Nonetheless, monthly changes in core consumer prices have moderated in recent weeks and even declined in March, which has prompted some degree of skepticism among analysts, who now consider it less likely that the Federal Reserve will be able to hike rates as early as June.

Most conspicuously, the Fed reiterated its commitment to “maintain the existing policy of reinvesting principal payments from its holdings” of debt securities and of “rolling over maturing Treasury securities at auction”. In the minutes that followed March’s meeting, officials extensively discussed and hinted at the potential unwinding of the USD 4.5 trillion balance sheet later this year. Analysts expect the Fed to gradually reduce the amount of reinvestments, which would allow for a slow normalization of its balance sheet and would in itself be equivalent to an interest rate hike.

The Federal Reserve has shown caution on how markets will react to the shrinking of its balance sheet and these, in turn, have adopted a wait-and-see approach until the Fed moves forward with the issue. Thus, the Fed is expected to attempt to minimize the fallout by first announcing the conditions that would trigger any significant change in its current reinvestment strategy. A first attempt to unwind the balance sheet in 2013 was met with a ‘taper tantrum’, which saw investors panicking in reaction to the news and drawing their money out of the bond market. This caused a drastic surge in bond yields and quickly made Fed officials reconsider the move.

The U.S. Federal Reserve’s interest rate median projection forecast for 2017 averages 1.4%, which is mostly in line with the Consensus view of our panelists. The panel sees the federal funds rate averaging 1.47% at the end of 2017. For next year, the Fed projects, on average, that the federal funds rate will end 2018 at 2.1%. The Consensus view among analysts is that the Fed funds rate will end 2018 at 2.18%.


Author:, Economist

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USA Monetary Policy May 2017

Note: Total assets on the balance sheet of the Federal Reserve in USD billion and Federal Funds Target Rate in %. Current rate set at a range of between 0.75% and 1.00%.
Source: Federal Reserve


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