Fed’s “Put” Still In Play After May Meeting
When the big players in Washington wrapped up the May FOMC session, the market buzzed: the Fed’s protective hand—known as the “Fed Put”—remains firmly in place. That’s because any further interest‑rate hikes are off the table for the foreseeable future, leaving a supportive backdrop for risk‑seeking assets.
Powell’s Clear‑Cut Plan
Chair Jerome Powell gave traders a shockingly “nice” update. He laid out two straightforward possibilities for the federal‑funds rate and three paths to get there.
- Keep rates where they are.
- Cut rates.
During the press conference, he made it crystal clear that a rate increase is off the table. In Fed vocabulary, “unlikely” basically means “near‑impossible.” But policymakers keep the door open just in case they need to pivot later.
Three Ways the Fed Could Move
- Cut rates if the FOMC gains confidence that inflation is inching toward 2%.
- Cut rates if an unexpected labor‑market slowdown nudges unemployment above the March projection of 4.0%.
- Hold rates steady if inflation stays relatively flat.
Bottom line: there is no hawk flying over the capital right now. If inflation stays stubborn, the Fed will keep rates flat. If it cools, the party starts with a rate cut. Despite a string of hotter‑than‑expected CPI readings, the FOMC is poised to act swiftly when conditions allow.
Balance‑Sheet Bops: Slower QT, More Liquidity
Quantitytive tightening (QT) is now on a slower track— the Treasury run‑off cap has been cut from $60 billion to $25 billion a month. While the Fed is fiddling with the size of its balance sheet and rates separately, this slide is a tasty nudge toward easing monetary policy. It shrinks the overall Fed balance sheet but reduces the risk of a funding crunch, keeping markets fluid and risk assets buoyant.
Why Risk‑Seekers are Still in the Green
Not only have the FOMC members reacted calmly to the recent uptick in inflation figures, but they’re also reaffirming their intent to loosen policy as soon as confidence in getting back to the 2% inflation target is solidified.
Coupled with the Fed’s ability to cut rates aggressively and inject liquidity if the need arises, this keeps risk assets on a positive trajectory for the foreseeable future. The “Fed Put” is still alive, encouraging investors to push further out into riskier territory.
Don’t Fight the Fed – It’ll Leave You Upended
Powell has shown no enthusiasm for further rate hikes at this moment, and that’s likely to stay the case. As the old adage goes: “Don’t fight the Fed”. Bearish equity markets might find themselves on a real knuckles‑down for a while, but the Fed’s supportive stance should act as a safety net for investors willing to brave the volatility.
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