May FOMC: Stalling in inflation leaves FOMC stalling for time

Summary

As was widely expected, the FOMC left the fed funds target range unchanged at 5.25%-5.50% at the conclusion of its May meeting. It was evident, however, that the Committee believes inflation's return to its 2% objective likely has a somewhat longer and uncertain journey ahead. In the post-meeting statement, the Committee noted that "in recent months, there has been a lack of further progress" toward its 2% inflation goal. This setback in obtaining confidence that inflation is on a sustainable path back to 2% reinforces our view that any reduction to the fed funds rate remains at least a couple of meetings away.

The Committee announced that it will slow the pace of quantitative tightening (QT) starting on June 1. The monthly cap for Treasury security redemptions was reduced from $60 billion to $25 billion, while the monthly redemption cap for mortgage-backed securities (MBS) was left unchanged at $35 billion. The slow-but-don't-stop approach to balance sheet runoff is an attempt to keep normalizing the size of the Fed's balance sheet without creating money market stresses like the ones that occurred in September 2019. The move to a slower pace of QT was well-telegraphed by the Committee, and the outlook for the federal funds rate will be far more critical to determining the level and shape of the yield curve in the months ahead, in our view.

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