Overnight the Fed left the benchmark Fed funds rate unchanged although there was a notable shift to a more dovish stance in response to a more uncertain outlook. In the press conference Jerome Powell highlighted a shift away from a patient stance in the statement to acknowledge: ‘In light of increased uncertainties and muted inflation pressures, we now emphasize that the committee will closely monitor the implications of incoming information for the economic outlook, and will act as appropriate to sustain the expansion’. Importantly, Powell noted ‘While the baseline outlook remains favorable, the question is whether these uncertainties will continue to weigh on the outlook and thus, call for additional monetary policy accommodation. Many FOMC participants now see that the case for somewhat more accommodative policy has strengthened.’
The updated economic projections show the median GDP growth estimate was left unchanged at 2.1% for 2019 and was edged higher to 2% (from 1.9%) in 2020. However, there was a downward revision to the median estimate of core PCE inflation to 1.8% from 2% for 2019 and to 1.9% in 2020 from 2%. The revised interest rate projections now show 8 officials looking for rate cuts with 7 out of 17 Fed officials projecting a 0.5% reduction in the Fed Funds rate by the end of the year and 1 official projecting a 0.25% cut. That said, the Fed funds median projection is still held at 2.4% for 2019 but falls to 2.1% in 2020 (down from 2.6% in the March projection).
Building on the strong performance since the end of April, US Treasuries rallied in response to the news that the Fed is prepared to cut rates if required with the UST 10 year yield breaching 2% and trading ~1.99% at the time of writing. At this stage, it looks like it would take a combination of stronger data points, better US inflation data and positive developments on trade negotiations, particularly between the US and China, to stand in the way of the Fed cutting rates at the next Fed meeting in July.