Policy Held Unchanged

The April FOMC meeting, which concluded yesterday, failed to deliver any fireworks and saw a mostly muted market reaction. The Fed held its monetary policy unchanged, as expected, keeping rates at record lows of 0.10% and asset purchases at $120 billion per month. In terms of the statement issues alongside the monetary policy decision, the Fed stuck broadly to its previous statement though there were some subtle changes to note.

On the Economy

On the economy, the Fed struck a more upbeat tone noting that Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened.” The statement went on to note that those areas of the US economy which had been hardest hit during the pandemic had “shown improvement”. Most notably, perhaps was the Fed’s assessment of the current risks to the US economy which were no longer described as “considerable”, which was the term used at the last meeting.

On Inflation

On inflation, the Fed noted that inflation had “risen” though stuck to its message that higher inflation would likely be transitory and not require a change in policy. Rising inflation expectations have been a key focus point over recent months though the Fed has been resolute in downplaying inflationary risks. In the press conference following the meeting Powell opined: “It seems unlikely, frankly, that we would see inflation moving up in a persistent way that would actually move inflation expectations up while there’s still significant slack in the labor market.”

Forward Guidance

Looking ahead, Powell said that the central bank was still “a long way off” removing accommodative monetary policy and said that policymakers haven’t yet discussed removing any easing. Powell noted that: “The economy is a long way from our goals and is likely to take some time for substantial further progress to be achieved,” he said. “We expect to maintain an accommodative stance to monetary policy until these employment and inflation outcomes are achieved.”

On Rates

On rates, Powell said: “With regard to interest rates, we continue to expect it will be appropriate to maintain the current zero to 0.25 percent target range for the federal funds rate until labor market conditions have reached levels consistent with the committee’s assessment of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time.”

In all, meeting passed as expected with the Fed acknowledging the improvements in the economy and the outlook while still fighting to keep its cards close to its chest and downplay any tapering expectations. Still, with vaccinations progressing and re-opening developing further, the June meeting could find the Fed in a very different situation which might require attention.

Technical Views

US10Y

Yields have turned a little higher following the meeting with price breaking out of the bull flag structure. 10Y is now trading back above the 1.584 level following the correction from 1.770 highs. If the market can break back above the 1.685 level bulls will be looking for a test of those highs next. Alternatively, if bears manage to carve out a lower high here, a further break below 1.584 could see the 1.424 support brought into play.

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