US
interest
rate
cuts
remain
far
off,
although
Federal
Reserve
Chair
Jerome
Powell
and
the
rest
of
the
central
bank
seem
unfazed
by
the
inflationary
uptick
in
recent
months.
As
widely
expected,
the
Fed
kept
the
federal-funds
rate
unchanged
at
5.25%-5.50%
at
its
May
meeting.
While
back
at
the
start
of
2024,
markets
expected
the
central
bank
to
begin
cutting
rates
as
soon
as
its
March
meeting,
inflation
has
run
much
higher
than
expected,
delaying
expected
rate
cuts
until
September
2024
or
later.
The
Fed’s
official
statement
Wednesday
and
remarks
from
Powell
did
little
to
alter
that
view.
The
Fed’s
official
statement
did
acknowledge
a
“lack
of
further
progress”
in
inflation
reduction
in
recent
months.
But
Powell
expressed
the
strong
belief
that
current
monetary
policy
is
“sufficiently
restrictive”
to
eventually
return
inflation
to
the
central
bank’s
2%
target,
and
it’s
therefore
“unlikely
the
next
policy
move
will
be
a
[rate]
hike.”
While
the
Fed
kept
rates
steady,
it
did
announce
the
details
of
a
long-awaited
change
in
its
effort
to
reduce
its
massive
holdings
of
bonds,
a
process
known
as
quantitative
tightening.
Fed
Waiting
for
More
Confidence
on
Inflation
Progress
Inflation
in
the
core
Personal
Consumption
Expenditures
Price
Index
rose
to
a
hot
4.4%
annualised
in
the
three
months
ending
in
March.
Core
PCE
inflation
had
been
1.9%
annualized
in
the
six
months
ending
December
2023.
That
strong
performance
made
most
market
participants
expect
rate
cuts
starting
in
early
2024,
but
those
expectations
have
been
seesawing
because
of
data
in
recent
months.
Meanwhile,
the
Fed
has
focused
more
on
year-on-year
data,
which
is
less
volatile
than
the
three-
or
six-month
indicators.
In
year-on-year
terms,
core
PCE
inflation
was
2.9%
in
December
2023
and
stood
at
2.8%
as
of
March
2024.
This
led
the
central
bank
to
be
far
less
ebullient
than
most
investors
at
the
beginning
of
2024,
and
conversely
not
overly
perturbed
by
the
bumpiness
of
a
few
months
of
bad
data.
Powell
stated
that
“gaining
sufficient
confidence”
on
inflation
progress
to
begin
cutting
rates
“will
take
longer
than
previously
expected.”
But
this
likely
references
the
Fed’s
prior
projections
from
March,
which
incorporated
three
rate
cuts
in
2024,
while
markets
had
shifted
to
expecting
just
one
cut
in
2024
well
before
today’s
meeting.
Fed
Announces
Quantitative
Tightening
Change
Longer-term
bond
yields
moved
a
bit
more
than
the
shorter
end,
with
the
10-year
Treasury
yield
down
about
5
basis
points
on
Wednesday.
This
was
probably
driven
by
the
Fed’s
decision
to
slow
down
quantitative
tightening.
The
cap
on
sales
of
Treasuries
will
drop
from
$60
billion
per
month
to
$25
billion.
Since
August
2022,
the
Fed’s
securities
holdings
have
dropped
by
about
$1.5
trillion.
Fed
Treasury
holdings
have
fallen
around
$1.2
trillion,
comprising
about
5%
of
the
book
value
of
all
outstanding
marketable
Treasury
securities.
But
Powell
did
note
that
the
reduced
pace
of
balance
sheet
runoff
does
not
reflect
an
adjustment
to
the
ultimate
size
of
the
balance
sheet,
merely
that
the
target
level
will
be
reached
“more
gradually.”’
The
first-quarter
uptick
notwithstanding,
we
continue
to
expect
inflation
will
normalize
over
the
rest
of
2024
and
beyond,
eventually
allowing
the
Fed
to
aggressively
cut
rates.
Our
year-end
2026
expectation
for
the
interest
rate
target
range
is
1.75%-2.00%,
down
350
basis
points
from
current
levels.
We
expect
inflation
to
dip
below
2%
in
2025,
while
slowing
economic
growth
will
add
further
reason
to
cut
rates.
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