to leave a comment.
Three members dissatisfied with 'easing hint' phrase... Trump's confidant suggests cut
Market reacts to 'hawkish freeze'... Mideast war-induced inflation fears persist
The US central bank, the Federal Reserve (Fed), held a Federal Open Market Committee (FOMC) meeting on the 29th (local time) and froze the benchmark interest rate. However, the decision is interpreted as a 'hawkish (preferring monetary tightening) freeze' because three members expressed a 'minority opinion' to block expectations of future rate cuts.
With Kevin Warsh, the next Fed Chair nominee, expected to lead the Fed from next month, the increasingly stark internal disagreements among Fed members, coupled with the high oil price shock from the US-Iran war, are expected to be factors that increase the Fed's policy uncertainty.
Ahead of the FOMC decision that day, market experts had no disagreement that the Fed would freeze the benchmark interest rate at the current 3.50-3.75% due to the surge in oil prices from the Iran war and increased economic uncertainty.
Michael Feroli, Chief Economist at JPMorgan Chase, predicted in a policy outlook report released before the April FOMC that the Fed would freeze rates for the remainder of this year. He further anticipated a 0.25 percentage point rate hike in the third quarter of next year, expecting the next policy move to be a hike, not a cut.
After freezing rates, the FOMC stated in its policy statement that "inflation has risen, partly reflecting recent increases in global energy prices," but also assessed that "the situation in the Middle East is creating significant uncertainty for the economic outlook."
Market participants noted that four minority opinions emerged at the FOMC meeting that day, where 12 members cast votes. Reuters reported that it was the first time since October 1992 that four minority opinions were expressed at an FOMC meeting.
Steve Myron, a Fed governor and former economic advisor to US President Donald Trump, opposed the rate freeze and advocated for a 0.25 percentage point rate cut, just as in previous meetings.
Separately, three members with rotating voting rights this year, including Regional Federal Reserve Bank (Fed) presidents Beth Hammack (Cleveland), Neel Kashkari (Minneapolis), and Lorie Logan (Dallas), agreed to the rate freeze in the decision but opposed the inclusion of an 'easing bias' phrase in the policy statement at this juncture.
The FOMC stated in its policy statement that "in considering the degree and timing of any additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks (to both inflation and employment)."
Since initiating the rate-cutting cycle in September 2024, the Fed has customarily used the phrase 'additional adjustments' in its policy statements up to this meeting.
It is understood that Hammack and the other two members expressed their opposition, deeming it inappropriate to retain the conventional phrase, which signals a 'rate cut' policy, in a situation where the possibility of the next policy move being a rate hike due to soaring energy prices cannot be ruled out.
Chair Powell hinted that the controversial phrase could be changed in the future.
Chair Powell stated at the press conference that "what happens over the next 30, 60 days, even up to the next (June) meeting, could significantly change the background context surrounding that phrase."
He added that he did not want to prejudge future meetings, but "changes could occur at a certain point, and that change could come as early as the next meeting."
Meanwhile, the minority opinion of the three regional Fed presidents today is seen as revealing the stark division of views within the Fed ahead of the launch of the Warsh system next month.
Brent Schutte, Chief Investment Officer (CIO) at Northwestern Mutual, told CNBC regarding the expression of minority opinions today, "It highlights the possibility of more similar situations arising in the coming months as a new Chair focused on Fed changes takes office," adding, "Furthermore, it reflects the reality of a highly uncertain short-term economic outlook."
Ahead of the FOMC outcome announcement today, the U.S. Senate Banking Committee passed the confirmation bill for nominee Warsh.
With the uncertainty surrounding the committee vote, which had blocked the confirmation, lifted, nominee Warsh is expected to smoothly take office after a full Senate confirmation vote, following the end of current Fed Chair Jerome Powell's term on May 15th.
Chair Powell stated at the press conference, "Today's conference will be my last as Chair," and "I congratulate the Senate Banking Committee on passing Warsh's confirmation bill."
However, he clarified that he would retain his position as a Fed governor even after his term as Fed Chair ends on May 15th. Powell's term as a Fed governor, separate from his Chairmanship, runs until January 2028.
Meanwhile, market participants interpreted the Fed's decision and Chair Powell's press conference remarks as hawkish (favoring monetary tightening).
According to FedWatch by the Chicago Mercantile Exchange (CME), the interest rate futures market reflected approximately a 12% probability that the Fed would raise the benchmark interest rate by more than 0.25 percentage points by December. Just a day prior, this probability was 0%.
As market participants withdrew expectations of a rate cut within the year, the probability of the Fed freezing rates for the remainder of the year increased from 80% the day before to 85% today.
Bond yields rose (bond prices fell) due to concerns about prolonged high oil prices and expectations of the Fed's hawkish policy stance.
According to electronic trading platform Tradeweb, the yield on 10-year US Treasury notes was 4.42% near the close of the New York stock market, up 6 basis points (1bp = 0.01 percentage point) from the previous session, marking its highest level in a month since late March.
Newsletter
Get key news delivered to your email every morning
to leave a comment.