Fed Remains Steadfast
The Fed remains determined to fulfill its dual mandate of 2% inflation and maximum employment despite market frustrations over recent upside surprises in inflation data. Fed Funds Futures repriced slightly in April; it now sees little more than one 25 bp cut by the end of the year.
The April US Federal Reserve (Fed) meeting carried significant weight, with market participants anticipating potential shifts in policy direction due to the recent strong data prints. However, Fed Chair Jerome Powell’s remarks brought a collective sigh of relief to the markets. Contrary to some expectations, Powell indicated that policy rates are appropriately restrictive and do not necessitate an increase. This sentiment led to a rally in the Treasury market, with yields declining.
The primary focus of the Fed continues to be price stability, particularly in relation to inflation. With employment showing signs of improvement, attention is squarely fixed on achieving the 2% inflation target. Powell emphasized the importance of monitoring a broad range of data points to assess progress toward this objective. Despite acknowledging a “lack of further progress” in reaching the target, Powell remains determined to anchor inflation expectations and achieve the desired goal.
While market and media outlets may express frustration over the pace of progress on inflation, Chair Powell remains resolute. He reiterated the Fed’s commitment to reaching the 2% inflation target and highlighted significant advancements in both inflation and labor market conditions. Powell’s unwavering determination underpins the Fed’s steadfast approach to monetary policy.
Regarding its balance sheet, the Federal Reserve announced plans to adjust its runoff of Treasury securities, starting in June. The runoff will be reduced to allow up to $25 billion of US Treasury debt to roll off per month, down from the current $60 billion. However, no changes have been planned for the runoff of Mortgage-backed Securities (MBS), which will continue at up to $35 billion per month. Powell clarified that the reduction in Treasury runoff is aimed at smoothing the transition to a smaller balance sheet and should not be interpreted as an expression of monetary policy.
Overall, the April Federal Reserve meeting reaffirmed the institution’s commitment to its dual mandate of price stability and maximum employment. Market participants remain vigilant as they assess incoming data and the Federal Reserve’s policy stance in navigating economic challenges and achieving its objectives.
The money markets did not see much change over the course of April. Fed Funds Futures did reprice slightly, and at the time of this writing have a little more than one 25 bp cut priced in by the end of the year, down from more than two 25 bp cuts at the beginning of the month.
We did see significant price action further out on the curve. Two-year US Treasury yields were higher by ~20 bp and 10-year yields were higher by ~25 bp. The curve continues to grapple with the timing of a move to lower rates. It has been difficult to lean into long duration. Credit spreads were relatively unchanged over the course of the month, reflecting strong demand and relatively easy financial conditions.
As we get closer to the middle of the year, and closer to the election, it feels as though market participants are bracing for impact. Hopefully the Fed gets its soft landing.