Finance, Treasury

Fed Maintains the Target Range in May

May 04, 2017

No hike in May 2017

After the hike in March, Janet Yellen and friends decided to hold the Fed Fund rates steady in May.

While some market participants were quietly hoping for another rate increase to follow after March’s hike, most players had rightly anticipated the status quo outcome. 

As we pour through the FOMC statement for clues, there are a couple of notable changes, omissions and additions to the language used between last night’s and that in March. (Strikethroughs – Omissions. Underlines – Additions)

  1. Information received since the Federal Open Market Committee met in February March indicates that the labor market has continued to strengthen and that even as growth in economic activity has continued to expand at a moderate pace slowed.
  2. Job gains remained were solid, on average, in recent months, and the unemployment rate was little changed in recent months declined. Household spending has continued to rise moderately while business rose only modestly, but the fundamentals underpinning the continued growth of consumption remained solid.Business fixed investment appears to have firmed somewhat.
  3. Inflation has increased in recent quarters moving measured on a 12-month basis recently has been running close to the Committee’s 2 percent longer-run objective. Excluding energy and food, consumer prices declined in March and inflation was little changed and continued to run somewhat below 2 percent. 
  4. The Committee expects views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term.
  5. In view of realized and expected labor market conditions and inflation, the Committee decided to raise maintain the target range for the federal funds rate to at 3/4 to 1 percent.
  6. Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Neel Kashkari; and Jerome H. Powell. Voting against the action was Neel Kashkari, who preferred at this meeting to maintain the existing target range for the federal funds rate.

What to expect next?

In my view, FOMC has revealed their growing optimism on the recovering economy, rosy employment numbers and the convergence of price levels with their expected inflation rates.

It will be hard to expect the FOMC not to continue their gradual hiking and tightening path. In fact, given the stock markets and markets expectations, for certain players and camps, they might already be far behind the curve.

For us, watch out. Higher rates are coming, low funding costs is certainly becoming a thing of the past.

about author

Seng Ti is currently heading a Treasury & Finance team in a MNC and is active in the Corporate Treasury scene. He enjoys reading and discussing about current affairs, politics, life, wine and lives a normal life with his wife and 2 young kids.