Fed includes a meaningful change in its statement

Friday 05 May 2023

May 2023 | 2 min read   

As expected by market participants, the Federal Open Market Committee (FOMC) of the Fed announced an increase of the federal funds rate by 25 basis points on 3 May. The Fed’s police rate is now set to the range of 5.00-5.25%, reaching the highest level since 2007.

  

In the statement, the FOMC removed the previous reference that “some additional policy firming may be appropriate” and replaced it with “the extent to which additional policy firming may be appropriate”. This was done to provide flexibility to the central bank, as further policy decisions will be data dependent and will be done on a meeting-by-meeting basis.

The stance of monetary policy is overall tight, and it is likely that the current fed funds rate are now at a terminal level, or close to, and this should support the return of inflation to 2% over time. Mr Powell, during the press conference, noted that the banking sector is resilient, but it is likely that credit conditions might tighten up further as a consequence of the difficulties experienced by US regional banks.

Mr Powell has attributed the market’s pricing of rate cuts this year to a different view on inflation than the FOMC has predicted, and that the road to policy normalization will be still long and bumpy. Looking ahead, the chair of the Fed still believes that a soft landing for the US economy is possible, as a recession won’t be needed to tame inflation. As the labour market is cooling down, a balance between supply and demand may happen soon.

Source: Amundi Institute, FOMC meeting, five key takeaways, 5 May 2023

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Date of first use: 5 May 2023
Doc ID: 2887161