Economic Flash

Fed Remains Patient but Responsive, Cutting IOER to 2.35%

by Craig Dismuke, Dudley Carter

The FOMC voted today to keep its overnight target rate range at 2.25% to 2.50%, retaining its expectations to be “patient” with future rate decisions as there remains uncertainty about future growth and inflation continues to undershoot the Fed’s 2% target.  The vote was unanimous.


The Committee’s assessment of economic activity was improved from March’s Statement saying “growth of economic activity has slowed” to May’s Statement that “economic activity rose at a solid rate.”


Household spending and business fixed investment were characterized in slightly less negative terms.  The March Statement said, “recent indicators point to slower growth,” emphasizing the forward-looking expectations for weaker activity.  The May Statement noted that “growth … slowed in the first quarter.”  Several indicators already point to household spending and business investment improving in the second quarter although uncertainty continues to cloud the outlook.


The March assessment of inflation noted that headline inflation was weaker as a result of lower energy prices (a temporary factor to Fed officials) but that core inflation remained “near” the Committee’s 2% target.  However, that assessment was revised lower to say, “overall inflation and inflation for items other than food and energy have declined and are running below 2 percent.”


The Fed remains uncertain about the future pace of growth although some of that uncertainty has dissipated as the year has progressed.  However, softer-than-target inflation remains a concern for officials.


In an effort to keep the effective Fed Funds rate near the mid-point of the Fed’s target range, the FOMC lowered the interest rate on excess reserves from 2.40% to 2.35%.  According to the Implementation Note, the decision was made to “foster trading in the federal funds market at rates well within the FOMC’s target range.”  Prior to the meeting, the Fed Funds effective rate was 2.45%, well above the 2.375% mid-point of the Fed’s target range.  This decision emphasizes that the Fed has the ability to be responsive with monetary policy decisions to evolving financial market conditions.


Treasury yields fell immediately after the release with the 10-year yield dropping from 2.48% to 2.45% and the 2-year yield dropping from 2.26% to 2.20%.


May 01, 2019

Federal Reserve issues FOMC statement

For release at 2:00 p.m. EDT


Information received since the Federal Open Market Committee met in March indicates that the labor market remains strong and that economic activity rose at a solid rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Growth of household spending and business fixed investment slowed in the first quarter. On a 12-month basis, overall inflation and inflation for items other than food and energy have declined and are running below 2 percent. On balance, market-based measures of inflation compensation have remained low in recent months, and survey-based measures of longer-term inflation expectations are little changed.


Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, 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.


In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.


Voting for the FOMC monetary policy action were: Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; Esther L. George; Randal K. Quarles; and Eric S. Rosengren.

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