The Fed keeps interest rates unchanged as expected. Powell’s words break the interest rate cut

Release time：May 06, 2019 From：admin

Beijing time May 2 2:00 Thursday, the Fed announced the latest interest rate decision, FOMC decided to maintain the federal funds rate unchanged at 2.25% -2.50%, the interest rate on excess reserves (IOER) from 2.4% to 2.35% , in line with market expectations. At the same time, the Fed reiterated its patience in monetary policy and raised the description of the economy to "the growth rate of economic activities remained stable." The market originally thought that weak inflation data would allow the Fed to consider cutting interest rates in the second half of the year. However, at the post-conference press conference, Powell broke the illusion with a word.

The Fed’s resolution reiterated that, given the development of the global economy and financial markets, as well as weak inflationary pressures, it will be patient with future interest rate adjustments. Consistent with the March FOMC statement, the Fed reaffirmed that the labor market remained strong and the unemployment rate remained low, and raised the description of the economy to “economic activity growth remained stable”. The statement six weeks ago stated that “economic activity growth rate” It has slowed down from steady growth in the fourth quarter of last year; it has maintained its judgment on the slowdown in US household spending and commercial fixed investment growth.

At the press conference after the meeting, Powell said that the Fed believes that the current policy is appropriate and does not see a high possibility of raising interest rates or cutting interest rates. The Fed is now considering tilting into assets that have matured for a longer period of time, and will later revisit the issue of the maturity of assets held later this year. The downgrade of IOER is a technical adjustment and does not mean a policy change. The Central European data has improved to some extent, and overseas risks have eased slightly. It is expected that the low inflation in the United States is only a temporary phenomenon and will rebound to the Fed’s target level in the future.

Although Powell did not explicitly say that he mentioned the possibility of interest rate cuts or interest rate hikes, the media mentioned that the Fed is experiencing a "Trump crisis." Three weeks ago, Trump and his chief economic adviser, Kudlow, urged the Fed to cut interest rates by 50 basis points. Just one day before the Federal Reserve announced its resolution (May 1st), Trump further requested the Fed to cut interest rates by 100 basis points, equivalent to returning to the benchmark interest rate at the end of 2017. He hopes that through the combination of QE+ rate cuts, the US economy will take off and reduce the size of debt.

Some commentators believe that Powell’s remarks are not enough for the doves. According to media reports, the market has already expected the Fed to cut interest rates, but Powell hinted that the Fed does not currently consider cutting interest rates. And Powell explained that the Fed still feels that inflation is weak due to temporary factors.

Investors were surprised to find that the Fed’s meeting was not as unpredictable as they had expected – the accident came from a word spoken by the Fed’s chairman.

Most people didn't expect that Powell would actually use the term "temporary" - the market originally thought that the weak inflation data in recent months would worry the Fed, and then may cut interest rates in the second half.

Obviously, Powell broke the market's interest rate cut fantasy. He added that the temporary factors driving down inflation may include asset management fees, clothing prices and ticket prices. In the future, inflation will return to the 2% target set by the Fed, and then lie on this target.

Prior to this, both Powell and the Fed’s monetary conference statement were cautious about inflation. This time, the Fed’s statement also hinted that the recent decline in inflation may be more durable than expected. Moreover, they no longer simply blame the fall in inflation on the decline in energy prices.

Due to this change in wording, the market's interpretation of the Fed's attitude has also changed. Now, the market believes that the Fed’s attitude on interest rate adjustment has no obvious tendency. It neither intends to cut interest rates nor intends to raise interest rates.

In other words, the Fed does not know where to go in the future, and it is even less clear when it will act. As they said before, they now rely on economic data to make judgments.