A More Positive Tone

As expected, and in keeping with the minutes from its March meeting, the Federal Open Market Committee (FOMC) decided to keep rates on hold. According to Ken Taubes, Executive Vice President, CIO, U.S. of Pioneer Investments, the Federal Reserve Board cited several important aspects of the US economy and global conditions that leave the door ajar for another June or July rate hike.

The Federal Reserve indicated that it would maintain the current level of the target Fed Funds rate at 0.25 to 0.50%, in line with the minutes of the March FOMC meeting.

The statement focused on US growth, rather than global conditions. The statement underscored factors underlying a strong consumer – improved labor market conditions, rising household real income, continued strength in the housing market and strong consumer sentiment – while acknowledging slower GDP growth, moderating household spending, soft business fixed investment and net exports.

The FOMC took the important step of excluding their prior observation that appeared in the lead-in sentence that "global economic and financial development continued to pose risks," implying that this risk has abated. Instead, they indicated that they will continue to monitor global conditions and moved this statement to the end of the second paragraph. The outlook for global growth has improved, in
the wake of more supportive global central bank policy, increased fiscal stimulus in China, recovering commodity and energy prices and increased inflation.

The statement continued to take a guarded view of inflation; the FOMC eliminated the comment that inflation had "picked up in recent months"; they maintained inflation would "remain low in the near term." Ken Taubes would cite the recent uptick in core CPI and core PCE as indications of increasing inflation. Apparently, the Fed has not completely bought into this upward trend.

Taubes believes the statement confirms the Fed’s assessment that the futures market still reflects too shallow a trajectory for rate increases. The Fed does not want be forced to implement sharp rate moves that could jolt markets and have a negative impact on still relatively low GDP growth. This assessment opens the door for a June or July rate increase. Taubes does not think any increase will occur, however, without continued strong employment data, coupled with improved household spending and stabilization in the manufacturing sector.