Fed Holds Rates Flat, Suggests It Will Likely Take Longer Than Expected to Cut Rates

Rates fall on Fed Day. The Fed acknowledged a lack of inflation progress today but offered a more dovish tone than expected, which pushed swap rates and Treasury yields lower. The short-end of the yield curve fell ~7bps, pushing the 2y yield back below 5%. 10y-30y yields closed 3-5bps lower. Attention will now shift toward Friday’s nonfarm payrolls and unemployment rate data, where the former is expected to decline to 240k jobs added in April from 303k in March.

Fed says more inflation progress needed. The Fed held rates steady today (as expected) and reiterated the need for greater confidence in declining inflation before cutting rates. Chair Powell said, “…readings on inflation have come in above expectations. It is likely that gaining such greater confidence [in declining inflation] will take longer than previously expected.” The Fed also announced it will significantly curtail quantitative tightening (QT) for the first time since the program began in 2022 by slowing the runoff of its US Treasury holdings from $60bn per month to $25bn per month. Evercore ISI analysts said the downshift in QT “has the serendipitous effect of putting some downward pressure on yields, mitigating the risk of a push upwards towards 5%.” Altogether, the meeting was interpreted as less hawkish than many anticipated given persistently elevated inflation. A side-by-side comparison of the May and March FOMC meetings can be read here. 

US manufacturing underwhelms while prices hit new highs since 2022. ISM manufacturing contracted in April after expanding for the first time since 2022 last month. Meanwhile, costs for manufacturing inputs rose to their highest level since June 2022, as ISM prices paid spiked to 60.9 from 55.8 previously. The data suggest that manufacturing is struggling, though chair of the ISM Manufacturing Business Survey Committee, Timothy Fiore, said that demand is showing signs of recovery.