FOMC members decided unanimously to keep the target range for the fed funds rate unchanged at 2.25-2.50%. Meanwhile, the IOER was lowered to 2.35% from 2.4%. The slight change in the accompanying statement showed a more upbeat assessment on the economic developments, despite softening inflation. It was Chair Jerome Powell’s comments at the press conference that triggered strong reaction in the bond and FX markets. US 2-Year Treasury yield rebounded to 2.3%, after falling to a one-month low of 2.268% in the prior day. USD index (DXY) also gained for the first time since April 25. Powell’s speech, attributing softening inflation to transitory factors, aimed mainly at pouring cold water on the doves who have been pricing in a rate cut later this year. There have been no new updates on the balance sheet reduction progress.

The Fed noted that economic activity since the last meeting “rose at a solid rate”. At the March meeting, the members acknowledged that “growth of economic activity has slowed from its solid rate in the fourth quarter”. US GDP surprised to the upside, growing +3.2% q/q annualised in 1Q19. On employment, the members noted that “job gains have been solid, on average, in recent months, and the unemployment rate has remained low”. This was largely a repeat of March’s reference but with the phrase “Payroll employment was little changed in February” omitted. The Fed acknowledged that both headline and core inflation ran “below 2%”, while in March it indicated that both measures remained “near 2%”. Indeed, inflation has continued to slow in the first quarter of the year. Core PCE eased to +1.6% y/y in March, compared with February’s +1.7%. On the forward guidance, it is reiterated that “the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes”.

As Powell elaborated at the press conference, the members “suspect that some transitory factors may be at work” regarding the recent slowdown in inflation. As such, the baseline view remains that, “with a strong job market and continued growth, inflation will return to 2% over time and then be roughly symmetric around our longer-term objective”. Meanwhile, Powell suggested that risks to global economic outlook “have moderated somewhat”, as evidenced in improvements in European and Chinese data, the temporarily- reduced risk of a disorderly Brexit, as well as the progress in trade talks with China.

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The meeting signaled that inflation has to accelerate to a sufficiently high level for a rate hike. In a similar vein, it has to decelerate to a sufficiently low for rate cut. Both scenarios seem unlikely in the medium-term. We expect the Fed stand on the sideline for the rest of the year. At the meeting, the Fed announced a technical change to the interest rate paid on required and excess reserve balances (IOER), cutting it by 5 basis points to 2.35%. This aims at helping to keep the effective Fed funds rate within the target range. It should not by any means be considered as a easing measure.

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