Payden & Rygel: Ahead of today's Fed meeting
Here are three topics we're pondering ahead of Wednesday's May FOMC meeting:
No Compelling Case For A Rate Cut Anytime Soon: With the recent macroeconomic data readings providing no compelling case to cut interest rates, the Fed's decision to stay on hold throughout the summer months could have significant implications for the financial markets. The three-month moving average of the monthly change in the core PCE price index at 0.4% suggests that the Fed will want to see AT LEAST three months of 'target-consistent' core PCE readings (i.e., <0.2%), potentially delaying rate cuts until at least September. We do not expect a cut until after the election (December) and think there's a good chance the Fed will remain on hold all year.
Taper Time: The FOMC will probably talk more about tapering its QT at the May meeting and tee up an announcement in June. However, the Fedcould announce a more specific timeline to taper QT at the May meeting. This move could see them reduce the amount of Treasuries allowed to mature every month as early as June, a marginally bullish outcome for Treasuries. In Chair Powell's words from the March meeting, the prudent path the Fed is considering is to start tapering QT fairly soon so that the balance sheet reduction can "go further."
Press Conference Pressure: Powell could face some tough questions in the press conference. At the last two meetings, Powell sounded confident that inflation would moderate and that rate reductions would soon follow. However, since the March FOMC meeting, inflation data has shown that certain categories, such as shelter costs and services costs, might remain stickier than previously thought. Tuesday's Employment Cost Index (ECI) release for Q1 will make every policymaker nervous. This uncertainty, with core inflation potentially hovering around 3% year-over-year at year-end in our forecast, raises the question: does the Fed face a similar problem like it did when it jettisoned the 'transitory' phrase?