Fed review: Maintaining easing bias
-
The Fed maintained rates unchanged as widely expected. QT pace for UST holdings will be reduced to USD25bn per month from June, largely as expected.
-
Powell provided few new clues on the policy outlook, but emphasized that the Fed continues to see its policy having a restrictive effect on demand. We still see rate cuts looming in the horizon earlier than what the markets are pricing in.
-
Initial dovish market reaction mostly faded after the press conference, with EUR/USD and 10y UST yields little changed from pre-meeting levels. Cumulative pricing for cuts by December rose from around 28bp to 34bp.
Powell made it clear that the Fed remains in a good place with its current policy. Further disinflation is still in the cards as price pressures from tight labour markets and housing continue easing, even if Q1 data weighed on the confidence surrounding the outlook. Powell did not see recent inflation prints as a sign of demand growth reaccelerating and downplayed the significance of easing seen in financial conditions since last fall, saying that there has been ‘no obvious connection’ between the two.
Powell was asked several times about the possibility of new rate hikes, but he avoided the speculation entirely, sparking a modest dovish reaction in the markets. The pricing of cumulative cuts by December rose from around 28bp to 34bp.
Powell outlined two paths to reducing rates, one where the Fed gains greater confidence in inflation returning to target and second where labour markets weaken unexpectedly. We don’t foresee sharp declines in activity, but still expect to see some further weakening in cyclical indicators and also a modest rise in unemployment rate.
Earlier today, the March JOLTs report showed that the ratio of job openings to unemployed job seekers declined to 1.32 (from 1.36), which is the lowest level since the initial Covidshock and only marginally above typical pre-pandemic levels (Chart 1). Lower job openings have been a strong leading indicator for lower wage pressures. April ISM Manufacturing index showed that firms’ order-inventory balances have started to weaken in line with signals from the PMIs, pointing towards weaker output growth (Chart 2)
Author
Danske Research Team
Danske Bank A/S
Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.
