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QT Continues at the slower pace announced in March.
By Wolf Richter for WOLF STREET.
The FOMC voted unanimously today to keep the Fed’s policy rates unchanged for the third meeting in a row, after cutting its policy rates by 100 basis points in 2024. Rate cuts remained in the fog of the future, as the Fed’s policy focus has shifted to both, inflation that has become persistent and that the Fed worries could accelerate, and the labor market that has remained solid but could weaken.
It kept its five policy rates at:
- Target range for the federal funds rate: 4.25-4.50%.
- Interest it pays the banks on reserves: 4.40%.
- Interest it pays on overnight Reverse Repos (ON RRPs): 4.25%
- Interest it charges on overnight Repos: 4.50%.
- Interest it charges banks to borrow at the “Discount Window”: 4.50%.
What changed in the FOMC’s statement:
New: “Although swings in net exports have affected the data, recent indicators suggest that economic activity has continued to expand at a solid pace.”
This was in reference of the dip in GDP caused by the historic spike in imports, even as business investment was strong, and consumer spending was OK.
Old: “Recent indicators suggest that economic activity has continued to expand at a solid pace.”
New: “Uncertainty about the economic outlook has increased further.”
Note: “increased further.”
Old: “Uncertainty around the economic outlook has increased.”
New: “The Committee is attentive to the risks to both sides of its dual mandate and judges that the risks of higher unemployment and higher inflation have risen.”
Old: “The Committee is attentive to the risks to both sides of its dual mandate.”
So risks, both of higher inflation and higher unemployment.
In addition, the statement deleted the technical section about the reduction of the pace of QT that had been in the March statement.
QT continues at the slower pace announced in March, the FOMC in said the statement. The Fed has already shed $2.26 trillion in assets since it started QT in July 2022. At the March meeting it announced that it would slow the pace of the Treasury run-off to $5 billion a month, but would let the MBS continue to run off as before without limit, whatever comes off, comes off, largely dependent on the pace at which the underlying mortgages are paid off or are paid down. Over the past few months, the run-off has been between $15 billion and $17 billion a month.
No-dot-plot meeting. This meeting was one of the four a year when the FOMC does not release a “Summary of Economic Projections” (SEP), which includes the “dot plot” which shows how each FOMC member that day sees the development of future policy rates. SEP releases occur at meetings that are near the end of the quarter. The next SEP will be released on June 18 after the meeting.
In the last SEP, released after the March meeting, FOMC members saw core PCE and headline PCE inflation rates running slightly higher at the end of 2025 – at 2.8% and 2.7% respectively – than they were at the time of the March meeting, thereby seeing an acceleration of inflation in 2025. By that time, the focus had already shifted from the labor market, that has remained solid, to inflation, that proved to be stubborn.
In terms of rate cut projections in the March SEP: 4 of the 19 members saw no rate cuts at all in 2025, and 4 saw only one cut, while 9 saw two cuts, and 2 saw three cuts in 2025. So the “median projection” was two cuts. But if one of the 9 two-cutters shifts to just one cut by the June meeting, and all others stick to their stories, the median projection shifts to just one cut in 2025.
It’s this combination of a relatively solid labor market and increased inflation worries this year that has caused the Fed to pivot back to wait-and-see.
The whole statement:
Although swings in net exports have affected the data, recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty about the economic outlook has increased further. The Committee is attentive to the risks to both sides of its dual mandate and judges that the risks of higher unemployment and higher inflation have risen.
In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Susan M. Collins; Lisa D. Cook; Austan D. Goolsbee; Philip N. Jefferson; Neel Kashkari; Adriana D. Kugler; Alberto G. Musalem; and Christopher J. Waller. Neel Kashkari voted as an alternate member at this meeting.
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The post Fully in Wait-and-See Mode, Fed Keeps Rates at 4.25%-4.50%, Frets about Higher Uncertainty, Higher Inflation, and Higher Unemployment appeared first on Energy News Beat.
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