- • The Fed lowered its target rate by 25 basis points to 2%. The statement acknowledged a weakening trend in business spending.
- • FOMC appears to be more concern with inflation and inflation expectations
- • While we do not expect further cuts in their next meeting on June 24th/25th, the Fed left its options open.
Growth and Inflationary Risks Are Becoming More Balanced
The Federal Open Market Committee announced today a 25 bp cut on its target for the federal funds rate, which now stands at 2%. The rate cut and the accompanying press release were in line with our expectations. The Fed is clearly balancing both growth and inflationary risks, where the latter is gaining weight with respect to the former. In fact, this is the second consecutive meetings with two members dissenting with the size of the rate cut.
Although core inflation continued under control, the Fed recognized that both headline inflation and inflation expectations have deteriorated in recent months. The Fed main worry is the continuing increase in the price of energy and other commodities. Although the Fed is expecting these prices to moderate over time, there is no certainty about their medium term path. This has led the Fed to go from a total disregard of inflationary pressures just a few months ago, to today’s announcement which states that “uncertainty about inflation outlook remains high”.
