The Fed Holds Rates Steady and Remains Patient

As expected, the Federal Reserve kept the target range for the federal funds rate at 5.25% to 5.50% at the May meeting of the Federal Open Market Committee (FOMC). Citing recent elevated inflation readings, the statement accompanying the announcement indicated that FOMC members consider it too early for rate cuts. Meanwhile, the Fed is planning to "taper" its quantitative tightening program in June by reducing the dollar amount of Treasuries it allows to mature without reinvestment.

Sticky inflation is a risk

There were a few notable changes to the Fed's statement from the previous meeting. A sentence was added acknowledging "lack of progress" on inflation in "recent months." That stickiness in inflation in the first quarter of this year is likely to keep Fed policy on hold until later in the year. The committee needs to see a resumption in the decline in inflation to feel confident enough to cut rates.

Inflation has fallen from its peak

Inflation has fallen from its peak

Source: Bloomberg, monthly data as of 3/31/2024.

PCE: Personal Consumption Expenditures Price Index (PCE DEFY Index), Core PCE: Personal Consumption Expenditures: All Items Less Food & Energy (PCE CYOY Index), percent change, year over year. Personal Consumption Expenditures (PCE) is a measure of consumer spending. Core PCE excludes food and energy prices, which tend to be more volatile.

The Fed's view of the economy is nearly unchanged, with the statement noting that the pace of economic growth is solid and job gains have been strong. However, Fed officials changed the wording describing progress toward balancing its two mandates—inflation and full employment—into the past tense. It noted that the risks to achieving its dual mandate of full employment and low inflation "have moved toward better balance over the past year" instead of "are moving." That might seem like a minor change, but it highlights how much the recent stalling in inflation's drop is seen as a risk for Fed policy.