The Federal Reserve (Fed) left its short-term target for policy rates unchanged at today’s meeting and announced a plan to slow the pace of Quantitative Tightening (QT) by more than market expectations.  Chairman Powell noted that the Fed still expects to reach its 2% inflation goal over time, although recent data has reduced the Fed’s confidence.  Powell laid out several potential paths for policy, adding that it is unlikely that the next rate move would be a hike.

Current Conditions – The economy has continued to expand at a solid pace since the Fed’s last meeting in March.  The Fed’s statement included new language to reflect a lack of progress toward the 2% inflation target.  Powell expects inflation will move back down over the course of this year, but recent data has added a greater element of uncertainty around his projection.  

Forward Guidance – This meeting did not include an update of the Fed’s economic projections.  Powell considers the current level of rates to be restrictive, pointing to the cooling of labor growth and weakness in rate-sensitive sectors of the economy.  Powell refrained from signaling any change in rates and reiterated the Committee’s “meeting-by-meeting” approach to policy.

Policy/Market Reaction – Today’s move was unanimously approved by the Committee.  The Fed will slow the pace of Treasury and mortgage-backed security run-off to a maximum of $60 billion per month.  The slow-down in QT is more than markets expected and ultimately a dovish adjustment at the margin.  Markets moved to discount slightly higher odds of rate cuts this year following Powell’s press conference.  Bond and stock prices rose on the announcement and the Dollar weakened relative to major currencies. 

Gary Pzegeo, CFA  joined the firm in 2007 as head of fixed income, focusing on portfolio management, trading, policy formulation and client service.