As expected, the FOMC decided to maintain the target range for the fed funds rate at ¾ to 1 percent in May. The decision to hold rates steady today was unanimous.
However, barring a Marine Le Pen-inspired financial crisis developing in Europe, we still anticipate another rate hike from the Federal Reserve at the June FOMC meeting.
Support for a June hike
The case for raising fed funds rate again soon was visible in today’s statement, if one knows where and what to look for. The FOMC acknowledged that economic activity slowed in the first quarter and that household spending rose only modestly, but the Committee held to the view that the slowing growth in the first quarter was likely to be transitory.
Further, on household spending, the FOMC statement noted that the fundamentals underpinning the continued growth of consumption remained solid. Moreover, progress toward the Federal Reserve’s dual mandate of full employment and 2.0 percent inflation continues.
The FOMC characterized the labor market as continuing to strengthen since March, and described job gains as solid.
The FOMC maintained its language around in inflation, stating that inflation on a 12-month basis recently has been running close to the Committee’s 2 percent long-run objective, despite some weaker readings on inflation in March.
The bottom line takeaways
We see nothing in the statement today that would dissuade the FOMC from raising the fed funds rate again in June. However, I do believe the FOMC is waiting for more confirmation of its forecast that U.S. economic activity will bounce back in the second quarter before making a final decision to pull the trigger on another quarter-point rate hike.
The statement today basically says the Fed is meeting the dual mandate on full employment and inflation, and should continue to do so with gradual adjustments in the stance of monetary policy. Expect steady and gradual rate hikes to continue this year as long as that continues to be the case.
Our baseline forecast is that the Fed will raise rates again at the September FOMC meeting and begin scaling back its balance sheet before the end of the year. The fed funds futures market’s initial reaction was to push up the probability of a June rate hike to 86.3 percent from a 69.6 percent probability prior to the May statement release.
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