FOMC Minutes Preview: No Hike But When To Cut?

As Newsquawk writes in its Fed minutes preview, at its May meeting, the FOMC left rates unchanged at 5.25-5.50%, as expected, and announced a higher-than-expected tapering of its QT program, where the monthly cap on Treasury runoffs will be reduced from USD 60bln to USD 25bln (exp. 30bln), while the monthly redemption cap on agency debt and agency MBS was maintained at USD 35bln.

While it continues to note that inflation has eased over the past year, it now acknowledges that in recent months, “there has been a lack of further progress” towards its inflation objective.

Still, Chair Powell ruled out the prospect of near term rate hikes, instead suggesting that the Committee could keep rates at current levels for as long as needed to bring inflation back down.

Elsewhere, the statement said that “risks to achieving its employment and inflation goals have moved toward better balance,” a slight tweak from the previous “moving into better balance,” which analysts said could reflect some growing concerns of an employment downturn. The statement also kept its guidance that the Fed 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%.

Powell suggested that Fed remains satisfied with its current policy rate, and future rate moves remained skewed towards rate cuts, even though cuts have been delayed and the bar has been raised. Powell also said when the Fed gets confidence on inflation, rate cuts will be in its scope, but he does not have great confidence either way on whether there will be rate cuts this year.

The Fed Chair reiterated that a rate hike was unlikely, alleviating some hawkish risks that traders harboured heading into the meeting. Powell did not put too much weight on the hot Employment Cost Index data in Q1, and even drew attention to some dovish data points, like the soft JOLTS job openings figures, which he said showed that policy was restrictive.

Since the meeting, PPI and CPI data have signaled that core PCE, the Fed’s preferred gauge of inflation, will ease in April. That said, officials still want to see several months of constructive inflation readings before any change in policy stance can be endorsed.

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In its preview of the Minutes, Goldman’s trading desk writes that the May FOMC meeting was “mostly uneventful but dovish overall” and we saw two takeaways from Chair Powell’s press conference.

• First, Powell pushed backed strongly against the possibility of rate hikes and emphasized that he is confident that the current policy stance is restrictive.
• Second, Powell offered no major clues on the timing of a rate cut but struck a consistently dovish tone on inflation. Consistent with Goldman’s views, he said he took little signal from the inflation uptick in Q1.

As a result, Goldman left its forecast unchanged and continues to expect two rate cuts this year in July and November

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Finally, in its preview, JPM’s trader Andrew Tyler, agrees with Goldman and writes that his main takeaways are that

• Rate hikes are off the table – gives support to the hypothesis that we have seen the peak in yields in this hiking cycle with 10Y just shy of 5% in Oct 2023 and YTD high is 4.70%;
• The Fed still expects growth without inflation – this Goldilocks outlook should help Equity investors gain comfort on the macro picture despite some signs of weakening (24Q1 GDP miss, Retail Sales print, and earnings from MCD, SBUX, and YUM);
• The Fed remains focused on shelter inflation – with Core Services and Super Core Services remaining problematic, disinflation in the shelter component would assuage many concerns in Equity markets.

Overall, while yields are likely to fluctuate it is generally a spike in Rates vol and/or yields making new highs that are problematic for Equities. As a result, according to JPM the latest Fedspeak suggests that, in the near-term, neither of those outcomes is likely so bond yields will not be a headwind for stocks.