Policy Normalization on Target: With St. Louis Fed President James Bullard casting the first dissenting vote under Chairman Jerome Powell’s leadership, the FOMC voted to maintain the target range for the Fed Funds rate at 2.25% to 2.50%. As has been the case for recent meetings, this decision to take no action at this meeting was generally expected by the market with an ~80% implied probability. The quantitative tightening policy that’s allowed the Fed’s balance sheet to contract by up to $50 billion/month is now reduced to $35 billion/month. The program is set to end entirely in September.
Growth: The official statement indicated that “economic activity is rising at a moderate rate,” a change from prior language indicating “solid” activity. GDP expectations for 2019 and 2020 increased slightly with the central tendency up to 2.0% – 2.2%for 2019 and 1.8% – 2.2% for 2020. The range for projections tightened for 2019 and widened for 2020, indicating less certainty ahead. Median projections for 2021 and longer-run remained at 1.8% and 1.9% respectively.
Unemployment: Consistent with recent payroll reports, “job gains have been solid, on average.” With 104 consecutive months of payroll expansion, the official unemployment rate was at 3.6% in May, yet year-over-year wage growth has not induced inflationary pressures. The median unemployment projection by committee members showed a 0.1% decrease across all time periods with the longer run rate now at 4.2%.
Inflation: The statement noted “market-based measures of inflation compensation have declined” and “survey-based measures of longer-term inflation expectations are little changed.” The Fed’s preferred measure (Core PCE) was at 1.6% in April and is below the symmetric 2.0% target. There was a general lowering trend in inflation-expectations among Committee members, with 2019 now forecast at 1.8% and 2020 at 1.9%. The focus on inflation appears to reflect how this is the primary area of concern, as opposed to Growth or Unemployment, and is likely to be a significant factor in near-term rate decisions.
Rate Projections: The Committee removed its “be patient” language and replaced it with an intention to “act as appropriate to sustain the expansion” amid “uncertainties” of economic activity (including trade), labor and inflation outcomes. Forward-looking expectations for rates moved as much as 0.50% lower, depending on the time horizon. While the “dots plot” still suggests no action in 2019, recent developments caused eight members to now project at least one cut to be likely before year-end. The longer-run median expectation has declined to 2.50%. Post-meeting, the Fed Funds futures are pricing in a remarkable 100% probability of a rate cut in July and at least three cuts over the next 12-months. Overall, the official statement and the press conference met the stock market’s high expectations for dovish messaging, and bond yields continued lower.
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