Fed holds rates, markets await policy clarity
Summary
Last week was another choppy week as investors continued to worry about higher inflation and slowing growth. The Fed’s projections did not assuage those concerns, as officials lowered their GDP forecast while raising their projections for core inflation. However, Chair Powell emphasized that they believe the “economy is strong overall” and are in a good position to wait for clarity.
Fed decision
The Federal Open Market Committee (FOMC) voted to hold the fed funds rate at a target range of 4.25%–4.50%. The FOMC also reduced the balance sheet runoff in Treasurys from $25B to $5B, with no change in agency Mortgage-Backed Securities (MBS). Chair Powell stated that they have observed “some signs of increased tightness in money markets” as part of the rationale for reducing the runoff. This change was widely anticipated as the Fed hinted at such a move in prior meeting minutes. The Fed is still projecting two rate cuts in 2025.
During last Wednesday’s press conference, Chair Powell stated that “uncertainty was remarkably high,” but they are “well positioned” to wait for clarity on tariffs, fiscal policy, and could respond quickly if there was a deterioration in employment. The meeting did not deliver any surprises that negatively impacted markets, which led to equities rallying on Wednesday before giving back those gains later in the week. Treasury yields also declined across the curve, with the 10-year Treasury closing the week at 4.26%. The probabilities for rate cuts did not change significantly after the meeting, with most traders expecting the next rate cut in June.
Source: CME Fedwatch
Other key releases and news
There were several other notable economic releases last week. Retail sales missed expectations — yet another data point reflecting a potentially slowing consumer. Housing starts, permits, and existing home sales all came in above expectations, which was a good sign for the struggling housing market. Jobless claims remained low at 223,000. Overall, the data remains mixed, and volatility will likely continue until there is clarity on U.S. policy.
From an international perspective, the Bank of England held rates steady, while the Swiss National Bank cut rates by 25 bps. Both stated “uncertainty” as part of their rationale, which is clearly the common theme among central bankers across the world.
The week ahead
PMIs, durable goods, and the PCE index will all be released this week.
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