FOMC May Meeting: Interest Rates Hold Amid Inflation Concerns

FOMC May Meeting: Interest Rates Hold Amid Inflation Concerns 

Tomorrow, the Federal Open Market Committee (FOMC) is anticipated to maintain interest rates between 5.25-5.50% during its May meeting. This decision stems from robust incoming data indicating persistent inflation and a slowdown in GDP growth, which are likely to keep the central bank cautious. However, recent meeting minutes suggested a shift towards a less restrictive policy stance later in the year, garnering attention from traders. They will closely observe Chair Powell's stance on recent inflation data during the press conference, amidst a predominantly hawkish sentiment.

Following the March Personal Consumption Expenditures (PCE) report, traders adjusted their expectations, pricing in around 36 basis points of rate cuts by year-end, a significant decrease from earlier projections. Despite the FOMC's March economic projections indicating three potential rate reductions in 2024, recent discussions have taken on a more hawkish tone, leading money markets to anticipate only one rate cut.

With interest rates likely to remain unchanged and Chair Powell expected to maintain a cautious approach, traders are eager for updates on the central bank's plan to reduce the pace of its balance sheet runoff. The majority of participants have signaled a preference to begin this process soon, potentially halving the monthly runoff pace, particularly for Treasury securities.

Morgan Stanley predicts minimal changes to the FOMC statement, highlighting solid GDP growth, strong job gains, and easing core PCE inflation. However, Powell's remarks are expected to emphasize the need for patience in addressing inflation concerns.

Looking ahead, the FOMC may announce parameters for tapering Quantitative Tightening (QT) in May, with a potential start in June. This move is anticipated to gradually reduce the pace of balance sheet reduction, particularly for Treasuries.

During the press conference, Powell is likely to stress the importance of maintaining a restrictive policy stance amid persisting inflationary pressures. However, he may also acknowledge the need for flexibility in response to unexpected changes in economic conditions.

Goldman Sachs suggests that recent hawkish remarks from Powell have had a positive impact on the market, despite mixed economic data. Powell is expected to reinforce a "higher for longer" message, indicating a prolonged period of restrictive policy to address inflation concerns.

The bank recommends specific hedges and trading strategies based on potential FOMC outcomes, focusing on themes such as European buybacks, US Megacap tech stocks, and hedging against hawkish pressures. Additionally, it advises caution in assessing US tech stocks and suggests opportunities for short-term trades based on macroeconomic factors.