Fed Stays Hawkish As June Rate Hike Expectations Remain On The Table

The US Federal Reserve Bank’s two-day FOMC meeting concluded yesterday with the central bank releasing a statement on the monetary policy. There were no changes to the Fed’s short-term Fed funds rate which remain in the range of 0.75% – 1.0%.

Fed officials left the benchmark interest rates unchanged and noted that the recent slow pace of economic activity in the first quarter was “transitory,” and focused instead on the continued strength in the labor market and business spending.

As a result, the central bank maintained its view that a rate hike in June is on the table, which all but diminished after the weak March payrolls report and a rather soft GDP growth in the first quarter of the year.

“The Committee 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,” the FOMC statement showed.

Immediately following the Fed’s statement, the rate hike odds for June rose to 71.6% which was a modest increase in expectations from 67% prior to the event, according to the CME Group’s rate hike probability tool.

CME Group: Fed funds rate probability

The Federal Reserve hiked interest rates in December last year and had signaled two more rate hikes this year. The markets are expecting the next rate hike in June followed by another rate hike in September this year.

In the FOMC statement, Fed officials only made minor changes to the tone of its statement. The FOMC statement acknowledged the slower pace of consumer spending but noted that the fundamentals supporting consumer spending still remained strong.

Latest reports on personal income and spending released this week showed that consumer spending remained flat in the month of March for the second consecutive month. The data indicated that growth was perhaps slowing and remained consistent with the first quarter’s GDP numbers.