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SNAP ANALYSIS: Fed holds rates; Powell focussed on inflation risks, and notes uncertainties, says policy on a good place

The Fed's decision to hold rates steady at 3.50-3.75% underscores its cautious stance amid ongoing inflation risks, with Powell signaling a hawkish tone despite unchanged economic forecasts.

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SNAP ANALYSIS: Fed holds rates; Powell focussed on inflation risks, and notes uncertainties, says policy on a good place

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  • STATEMENT: The FOMC maintained rates at 3.50-3.75%, with no change to the forward-guidance sentence on considering "the extent and timing of additional adjustments" or to its commitment to maximum employment and 2% inflation. On the vote, only Miran dissented in favour of lower rates. Some had expected him to be joined by Waller again, while others had suggested Bowman could also join the dissenters in calling for a rate cut. The March statement left the economic assessment broadly unchanged, except that "the unemployment rate has shown some signs of stabilisation" was replaced with "the unemployment rate has been little changed in recent months". However, "economic activity has been expanding at a solid pace", "job gains have remained low", and "inflation remains somewhat elevated" were unchanged. In its risk assessment, January's reference that "uncertainty about the economic outlook remains elevated" was retained, while March added that "the implications of developments in the Middle East for the US economy are uncertain." Balance-sheet and implementation guidance were also unchanged.
  • SEP: The Fed raised its near-term and medium-term growth forecasts, lifted its inflation projections and only modestly softened its labour-market view. GDP was revised up to 2.4% (prev. 2.3%) for 2026, 2.3% (prev. 2.0%) for 2027 and 2.1% (prev. 1.9%) for 2028. Long-term growth was revised up to 2.0% from 1.8%. PCE and core PCE were both revised higher, with the biggest change in 2026, when both were raised to 2.7% from 2.4% and 2.5%, respectively. The unemployment projection was unchanged for 2026 at 4.4%, but was nudged up to 4.3% in 2027 from 4.2%. The median rates path was unchanged through 2028, though the longer-run fed funds rate edged up to 3.1% from 3.0%.
  • POWELL PRESSER: Fed Chair Powell's press conference leaned hawkish, despite the SEP median dots remaining unchanged. His main concern was clearly inflation persistence rather than growth weakness. He repeatedly stressed the need to see further progress in goods disinflation, flagged frustration over sticky non-housing services and made clear that, if inflation progress does not resume, cuts will not follow. He also sounded wary of fresh upside inflation risks from tariffs, which he continues to see playing out by mid-year, as well as from oil and the Middle East. The key point was that energy can be looked through only if inflation expectations remain anchored, but it would not be looked through lightly. Powell said a number of officials had noted that short-term inflation expectations had risen, while long-term inflation expectations were "solid", adding that the Fed was strongly committed to keeping inflation expectations anchored around target. On rates, Powell kept optionality but did not open the door to near-term easing. He said policy was in a good place, noting it was around the high end of neutral, or only modestly restrictive, suggesting the hurdle for cutting remained evidence-based rather than pre-emptive. He also pointed to a meaningful shift within the Committee towards fewer cuts and said a hike was discussed at the meeting, but stressed that the "vast majority" did not see that as the base case. Finally, Powell said the labour market was being watched closely, particularly weak private payroll growth, but stopped short of suggesting employment risks now dominate the Fed's policy balance.
  • FED CHAIR JOB: Powell said that if a successor is not confirmed before his term as Chair ends, he would remain in place as Fed Chair "Pro Tem". On his role beyond that, he said he has no intention of leaving the Board of Governors until the DoJ investigation is over. And beyond that point, he said he has not yet decided whether he would stay on as a Governor once the probe is resolved.
Context

This suggests policymakers are prioritizing inflation control over immediate growth concerns, which could maintain upward pressure on yields and support a stronger USD, reflecting prudent policy amidst global uncertainties.

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