Fed leaves interest rates unchanged

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Published Date 5/2/2018

The FOMC policy statement was right on what markets had been expecting; no rate increase.

The labor market has continued to strengthen and that economic activity has been rising at a moderate rate.
Recent data suggest that growth of household spending moderated from its strong fourth-quarter pace.
On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent.
Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Inflation on a 12-month basis is expected to run near the Committee's symmetric 2 percent objective over the medium term.
Risks to the economic outlook appear roughly balanced.
The stance of monetary policy remains accommodative.
The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate.

This was one of the most dovish policy statement we have seen so far and in many people's judgment removes that idea that the Fed would increase the Federal Funds rate three more times this year…Markets had been moving toward a more active Fed; we hold just two more as we have noted previously. All FOMC voters agreed, no decent.

OK, that is behind us now. Looking ahead, tomorrow another couple of key data points; weekly claims (224K from 209K), Q1 productivity and unit labor costs…inflation data, (productivity +0.9%, unit labor costs +3.0% up from 2.5% previously), April ISM non-manufacturing index (58.4 from 58.8), March factory order (+1.3%).

If that isn’t enough key data, Friday the April employment report. NFP jobs expected +195K, private jobs +190K, unemployment 4.0% from 4.1%, average hourly earnings +0.2%.

The FOMC took some of the inflation worries away for the time being and dampened that three core increases back to two with the next 0.25% increase still likely at the June meeting. There isn’t any significant change at the Fed, just more caution about moving too rapidly. In the past the Fed has had a history of getting behind the circumstances that led to more aggressive changes, so far the Fed hasn’t fallen behind and likely concerned about the forward outlook for the economy. Q1 earnings have, for the most part, beaten forecasts but many of the companies reporting that the outlook isn’t as solid as in the past. President Trump’s tariffs hang over markets presently; we believe the FOMC framed the policy statement to take the uncertainty into the context. Nothing changed, rate outlooks remain negative. The 10 yr, however, got through the FOMC still trading under 3.00%.

Source: TBWS

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