• As expected, there is no change in rates: Fed Funds range is 4.25% to 4.5%.
• Risks to both sides of their dual mandates
• Uncertainty keeps them on hold

Neutral

The choice the FOMC made today was to do nothing. That is a decision that has future long-term consequences, even though it doesn’t gather the headlines of a hike or a cut. Their forward-looking models are having trouble dealing with uncertainty.

What changed at this meeting was a larger focus on the trade picture. The statement led off with a comment on exports, although they acknowledged the economy continues to “expand at a solid pace.” They stated that the labor market is still not under any stress, yet “inflation remains somewhat elevated.” Consequently, there are concerns on economic growth as well as inflation that could accelerate.

They are staying on track with the reduced Fed balance sheet runoff announced at the last meeting. A quick review: The Fed buys Treasury bills and bonds directly from the Treasury and in the secondary market. This portfolio of Treasury securities peaked after shutdowns at $8.9 trillion in April 2022.

The Fed’s balance sheet is now $6.7 trillion, a decline of just over two trillion dollars. Long-term, the Fed’s goal is to get the portfolio down to around $4 trillion. The runoff of $2T was achieved by the Fed not reinvesting proceeds from maturing bonds. To slow the runoff means as bonds mature each month, the Fed will take more of those proceeds and reinvest them into Treasury securities. Buying more bonds each month places more dollars into the banking system or the Treasury. The current runoff increases the amount of dollars into the banking system by $20 billion per month.

Markets

We believe the Committee will continue to keep short-term rates at these levels for most of this year. Fed Funds futures show expectations for three 0.25% (25 basis point) cuts this year, and that did not change from before the meeting.

After the meeting announcement, equity and bond markets are not materially changed, as this was the expected outcome. 

Summary

Short-term rates will not change in the next few months. Fed Committee members see too much uncertainty in the future to make a call as to which is the larger risk, unemployment or inflation.

The next thing to watch is whether “hard data” will continue to decline, as the “soft data” (sentiment and consumer surveys) is indicating. The latest real, or hard, data still shows businesses hiring and consumers spending. Too cloudy to make a call.  

Please let us know how we can help you. 

Mark Frears is a Senior Investment Advisor, Managing Director, at Texas Capital Bank Private Bank. He holds a Bachelor of Science from The University of Washington, and an MBA from University of Texas — Dallas. 

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