Market Views from the Global Fixed Income, Currency & Commodities (GFICC) group
The Federal Open Market Committee (FOMC) voted to keep the federal funds rate target range steady at 3.50%–3.75%. There were four dissents. Governor Stephen Miran dissented in favor of a 25-basis point (bps) cut while Presidents Hammack, Logan and Kashkari supported keeping the policy rate unchanged “but did not support the inclusion of an easing bias in the statement at this time.”
Changes to the FOMC Statement:
- The Federal Reserve (Fed) maintained its description of growth as “solid” and job growth “remained low”. They adjusted their assessment of inflation, describing it as "elevated, in part reflecting the recent increase in global energy prices".
- On the balance of risks, the Fed maintained that the “developments in the Middle East are contributing to a high level of uncertainty”.
- The Fed maintained its existing forward guidance that the “extent and timing” of “additional adjustments” would be data dependent.
Key Quotes from Chair’s Press Conference:
On Inflation and the Energy Shock:
- “With energy it's so hard to say. I mentioned, you know, in, you know, sort of the textbook you would look through it and oil shock because they tend to be short lived and tend to revert. And monetary policy works with long variable lags. So you wouldn't necessarily react right away. I think that is all the more true given we're several years above two percent inflation and that we're already looking through the tariff shock. So, I think we're going to be very cautious about that. But the question about looking through energy really is not in front of us right now. It hasn't even peaked yet. I think we want to see the back side of that and progress on tariffs before we even thought about reducing rates.”
- “I don't know what gas prices are going to do for the rest of the year. And it will depend on how long the strait remains closed and how co quickly it can reopen and that kind of thing. But remember when gas prices go up, that's disposable income coming out of people's pockets so they're going to spend less on other things. So, there will be a hit to GDP [gross domestic product]. So, it's a question whether spending, you know, goes down to offset the inflationary effects. So, it's not -- the answer isn't obvious ex-anti whether you should move the rate because of that. We'll have to see how it evolves.”
On the Fed’s “Easing Bias”:
- “The good news is we think our policy stance is in a very good place for us to wait and see. We're right kind of at the high end of neutral or perhaps mildly restrictive. The labor market shows more and more signs of stability. Whereas inflation is kind of misbehaving. So maybe a little bit of restriction or the high end of neutral is the right place to be. So we can wait here and see how things work out before we act…I think because we feel like we're in a good place to move in either direction, nobody's calling for a hike right now.”
- “I think we are pretty close to the neutral rate. I always had it between three and four percent. We're little north of three-and-a-half. So that's well in the range of what I consider reasonable. But at the higher end of the range what I would consider reasonable neutral rate. You know, I think the labor market is still probably cooling off just a little bit. And I don't think there's much of a case for, any case really for policy looking, you know, meaningfully restrictive. Maybe mildly or neutral I would say.”
- “We had quite a vigorous discussion about that have issue and the guidance and is it still appropriate and that kind of thing. Ing I would say the number of people on the Committee who either could support that language change, changing to a more neutral stance so that a hike is likely as a cut, that number has increased over the intermeeting period. It's easy to see why… So, the majority of the Committee did not want to do that. And I was, I didn't think we needed to do it this meeting. It really was just a question of why do we need to do that now. We have so much to learn. There's so much uncertainty about the path ahead. There doesn't need to be any rush to make that decision now. Because, you know, what happens in the next thirty, sixty days, even by the next meeting could really change the picture around that language. The markets are not confused about our reaction function. We don't have a problem to solve on that.”
- “So, I think that, you know, the center is moving toward a more neutral place. And that's sort of what markets are saying, too. I just think, you know, there's a lot of signaling going on when you change guidance like that. And so we just -- I guess the majority, a majority of us didn't feel like we needed to send a signal on that right now. But maybe it will come to that.”
On his Remaining Tenure at the Fed:
- “This is my last Press Conference as Chair, and I will close with a few thoughts. First, I want to congratulate Kevin Warsh on his advancement out of the Senate banking committee this morning. This is an important step forward and I wish him well as that process continues.”
- “I've said that I will not leave the Board until this investigation is well and truly over with transparency and finality and I stand by that. I am encouraged by recent developments and watching the remaining steps in this process carefully. My decisions on these matters will continue to be guided entirely by what I believe in the best interest of the institution and the people we serve. After my term as chair ends on May 15th I will continue to serve as a governor for a period of time to be determined. I plan to keep a low profile as a governor. There's only ever one Chair of the Federal Reserve Board. When Kevin is confirmed and sworn in, he will be the Chair. Once sworn in his colleagues will elect him to Chair the FOMC as well.”
- “In terms of when I will leave. I will leave when I think it's appropriate to do so… I'm literally staying because of the actions that have been taken. I had long planned to be retiring. And, you know, the things that have happened really in the last three months of I think left me no choice but to stay until I see them through at least that long. You know, in addition, I don't see how this will interfere. My intention is not to interfere. I was a governor for almost six years. And the tradition is at the Fed that Governors who understand how difficult the role of Chair is and as a soon to be former Chair I do understand how hard it is to get consensus with nineteen strong minded people, you work with the Chair. You try to be heard but also collaborate with the Chair and try to support the Chair when you can. When you can't, you can't. And I think that is the attitude that people generally take and that's the attitude that I'll take.”
Our View:
- The Fed held rates steady as previously expected. The developments in the Middle East have caused uncertainty to rise. Since the March meeting, the war with Iran has persisted along with elevated energy prices. Hiring data has been volatile but firings remain low. Growth remains sub-trend after smoothing through the noise. The Fed’s preferred measure of inflation, personal consumption expenditures (PCE), is running notably hotter than the Consumer Price Index (CPI) and other trimmed mean inflation measures that reflect continued progress towards cyclical disinflation. Similar to last year’s trade shock, we expect the Fed to look through the energy price increase, choosing instead to focus on wage and services disinflation in addition to inflation expectations over the medium term.
- We maintain our base case of sub-trend growth. Real gross domestic product averaged 2% in 2025. Growth in the first quarter is projected to re-accelerate relative to Q4 due to the re-opening of the government after the prolonged shutdown. Business investment in sectors such as technology and artificial intelligence (AI) remains robust but a broader capital expenditure (capex) boom outside of tech remains limited. The consumer has remained resilient but faces headwinds from slowing real income growth.
- Despite the recent developments in energy markets which pose upside risks to realized inflation in the near-term, we maintain our fair value range for the 10-year U.S. Treasury at 3.75%– 4.25%. Limiting yields from falling meaningfully below the bottom end of the range is the lack of a sharp deterioration in labor markets or pickup in layoffs that would cause the Fed to pull forward rate cuts. Limiting yields from rising meaningfully above the higher end of the range is the stability of long-term inflation expectations despite the recent increase in oil prices and the skew around the Fed’s next policy move still being biased toward rate cuts over rate hikes. The majority of the Committee did not believe it was appropriate to formally communicate a change in forward guidance away from easing to a more neutral stance, but Chair Powell acknowledged the center is moving towards a more neutral place.