Fed Hawks Will Fly Lower—Eventually

Originally published in Stephen Dover’s LinkedIn Newsletter, Global Market Perspectives. Follow Stephen Dover on LinkedIn where he posts his thoughts and comments as well as his Global Market Perspectives newsletter.

As was widely expected, the Federal Reserve (Fed) decided to again leave the fed funds rate unchanged at the Federal Open Market Committee (FOMC) meeting that concluded on May 1, with members voting to maintain the target rate range at 5.25% to 5.50%. However, the central bank did tweak monetary policy through reducing the balance sheet runoff (or quantitative tightening) from US$95 billion per month to US$60 billion. Agency mortgage-backed securities will continue to run off at US$35 billion per month, and the US Treasury runoff will go from US$60 billion per month to US$25 billion. The Fed’s balance sheet is still US$7 trillion, though, after nearly doubling in size to US$9 trillion in response to issues the pandemic had created.

Although there were no huge surprises coming out of the meeting, the subsequent statement and press conference from Fed Chair Jerome Powell was interesting nonetheless and may have provided hints at how the FOMC is thinking about future monetary policy changes.

Its last meeting in late March was a quarterly FOMC meeting, so the Fed released an updated “dot plot” (formally named The Summary of Economic Projections or SEP) that still showed that the median dot was three cuts with minimum increments of 25 basis points by the end of 2024. However, it was only one dot away from showing the median as two cuts.

Since then, there has been some significant repricing in the fed funds futures market,1 which now indicates that the six or so cuts expected at the beginning of this year are now more like only one or two cuts.