May FOMC Meeting: A Quiet Quarter with a Few Surprises
Strap in, people. The Fed’s May meeting was pretty much what the headlines said it would be: no rate changes, no eye‑opening guidance, and a slightly faster taper than some of us had been hoping for.
What’s the Big Picture?
- Rates stay put. The committee left the federal‑funds target range where it is – 5.25 % to 5.50 % – once again. This marks the seventh straight meeting that the FOMC decided the best thing to do is keep things steady.
- Next move? Cuts. That is the unanimous theory. As inflation drifts toward the 2 % goal, the Committee expects a loosening of policy.
- QT’s new pace. From June onward the Fed will trim the money supply more aggressively: Treasury runoff will shrink to $25 bn a month, down from $60 bn, while mortgage‑backed securities will keep the same $35 bn limit.
Why the Faster QT Taper?
Two main reasons:
- The Fed is looking to avoid a “funding squeeze” that could come from a liquidity drain as the balance sheet shrinks. With the overnight reverse‑repo facility declining to almost nothing by the end of June, worries about banks running short of reserves grow.
- By nipping the QT at the bud, the Fed can keep tightening longer, shrink the balance sheet mainly to Treasuries, and by doing so minimise stress on financial markets.
How Chair Powell Talked About It
During his press conference, Powell basically repeated what he had said in March and at the IMF last month. The key points:
- He ruled out a new rate hike as “unlikely.” The focus is on what length of time rates must stay current to keep inflation under control.
- He didn’t go into a hawkish or dovish mode; he stuck to a balanced tone, making sure not to lie in the reporters’ trap asking if hawks were on the way.
The Market’s Quick Response
Overall, the stock market did a bit of a brisk switch. Equities took a rally, 2‑year Treasuries climbed, and gold popped by roughly 2 %. The dollar eased below the 106 level on the same day. The market pricing for future rate moves nudged a little more dovish, with around 4 basis points of cuts now priced in for the end of 2024.
Looking Ahead
We’re looking at a Fed that’s:
1. Still itching for rate cuts. The next move will most likely lower the fed‑funds rate before the Committee starts pulling back from a higher stance.
2. Booming on QE tapering. The new, faster pace should keep risk‑assets buoyed over the medium term and keep the “Fed Put” alive for investors.
3. Moderately complacent on the currency front. With hawkish predictions shelved, the dollar might not have a strong rally unless the Fed seriously talks about a hike, which they don’t anticipate.
Bottom line: the FOMC keeps telling us where it wants to go – towards cuts – and that direction will carry market sentiment as long as the data backs it. It’s a simple, if not particularly exciting, dance for this quarter.
