Overview
The statement contained small changes to reflect strong first-quarter GDP but softer inflation data since the Fed’s last meeting. However, it gave almost no hints on the threshold for a ‘precautionary’ cut, which markets had been looking for.
Press conference more hawkish
In the press conference, Chairman Jerome Powell struck a somewhat more hawkish tone, attributing the unexpected fall in core inflation this year to “transitory factors” and expressing little concern about the underlying inflation picture at the moment.
When pressed on the potential for a rate cut, he did not provide much for markets to cling to, simply emphasising that the committee is satisfied with the current policy stance. Powell also acknowledged that the negative cross-currents facing the US economy earlier in the year have now moderated, reinforcing the stance that there is no need to adjust policy in any direction right now.
Next year might be a different story
With the bar for a rate cut clearly high, we believe the Fed will probably remain in “wait and see” mode through 2019. Beyond that, the combination of easier financial conditions, continued tightening in the labour markets and some improvement in growth and inflation might necessitate another policy pivot, putting the Fed back onto the policy normalisation trajectory in 2020. This remains our base case. Given the current expectations of no more rate hikes, markets would be vulnerable in that scenario.
