This past Wednesday, the Federal Reserve held their May FOMC meeting where they left the fed funds rate unchanged for the sixth consecutive meeting.

The Statement

As expected, the Fed announced they will begin tapering the pace of balance sheet reductions. They will cut the treasury run off cap from $60 billion to $25 billion, while keeping the mortgage-backed securities (MBS) cap at $35 billion. The statement specifically emphasized that proceeds from MBS principal will be reinvested in treasuries. Also added in the statement was a note on the recent lack of further progress towards the Fed’s 2% inflation objective.

The Presser

Tthe press conference came off more dovish than some may have expected, but Powell clearly tried to strike a balance, as he often does. While he noted that the Committee largely agrees it may take longer to gain the necessary confidence to cut rates, he made it clear that a rate hike is not in his base case expectation. When asked what it would take to trigger a rate hike, he said “(We would) need to see persuasive evidence that our policy stance is not sufficiently restrictive to bring inflation down to 2%.” Powell left no doubts that he believes the next policy move will be a cut rather than a hike.

Powell also addressed two very large elephants in the room during the press conference – the upcoming election and stagflation risk. On stagflation, he noted that we are in drastically better shape today than we were during the last stagflationary event in the 1970’s where unemployment was in the double digits and inflation was in the high single digits. On the looming election, he challenged anyone to go back in the Fed transcripts and find a point in time where his Fed was influenced by an election. This is Powell’s fourth election while being employed by the Fed and he has served as the chair during both the Trump and Biden administrations.

The Dove

“It’s unlikely that the next policy rate move will be a hike…but it will depend on the totality of the data…”

“I don’t see the stag or the flation.”

The Hawk

“It is likely that gaining confidence needed to lower interest rates will take longer than previously expected.”

“Of course we’re not satisfied with 3% inflation. 3% can’t be in a sentence with satisfied.”


The preliminary first quarter GDP number surprised markets, growing only +1.6% on an annualized basis versus the +2.2% estimate. While the stagnation implied by slowing growth disappointed the market, the underlying components provided some comfort. Trade and inventories were the primary drivers in the disappointment, with the deterioration in the trade deficit being a function of the stronger U.S. economy which boosted import demand as relative weakness around the world muted the demand for American exports. The weakness in inventories also seemed less frightening when looking at the data underlying consumer spending for the quarter. While overall spending grew 2.5%, the continued strength was skewed towards services, which grew 4.0%, while goods consumption declined 0.4% – supporting the idea that businesses are remaining disciplined in managing inventories.

Capital spending grew at a 2.9% rate in the quarter with spending on intellectual property increasing 5.4% in a strong sign of continued business investment in productivity enhancing technology. Powell has consistently noted the Fed is paying attention to the possibility of prolonged above-trend productivity, which could both contribute to economic growth and ease tightness within the labor market.

March durable goods orders grew 2.6%, above the 2.0% estimate and the +0.7% from February, confirming that businesses continue to spend to meet consumer demand. As transportation orders were up 7.7% month over month, it is better to look at core orders (non-defense, ex-aircraft) which grew at a much more modest 0.2% with February revised down to +0.4% from the originally reported +0.7%.

While earnings season is still under way, as of Thursday, 62% of the S&P 500 have reported, with an average 1.2% surprise on revenue expectations and 9.4% surprise on earnings expectations. Consumer Discretionary (i.e. Starbucks, McDonalds, Tesla) and Real Estate sectors are coming in relatively weak, while Communications (i.e. Alphabet, Meta, Netflix) and Utilities sectors are seeing more robust results. Major retailers such as Target, Walmart, and TJX will close earnings season out later this month and should provide some insight into the health of the US consumer.


Along with the preliminary first quarter GDP number came the chain price measure (GDP Price Index), which surprised at +3.1% – well above the +2.7% estimate and the +1.7% from the fourth quarter. One day after the GDP Price Index data, the March PCE data met expectations, coming in at +0.3% sequentially on a headline and core basis. With the recent inflationary data indicating a pause in progress towards the Fed’s 2% goal, there is still little indication that inflation is poised to reaccelerate.

Earlier last month, March CPI had spooked markets, rising 0.4% on the month, bringing year-over-year headline CPI to 3.5% from the 3.2% we saw in February. Core CPI, which excludes more volatile food and energy prices, also missed expectations, coming in at +0.4% month over month versus the 0.3% estimate – maintaining the 3.8% year over year rate we saw in February. Within the core CPI print were weaker goods driven by lower new vehicle and used car prices. Core services, however, maintained their +0.5% pace from February driven by stubborn car insurance, shelter, and medical prices.

Job Market

This Friday, the April jobs report showed a continuation of cooling labor market conditions. Nonfarm payrolls increased by 175,000 on the month – well below the 240,000 expectation. The unemployment rate unexpectedly rose back to its 3.9% we saw in February. Wage growth grew 0.2% month over month, which was 10 basis points below expectations, bringing the year-over-year wage growth to 3.9%. With this tick up in unemployment and a slower than expected wage growth, economists will be more hopeful that inflation will continue towards the Fed’s 2% goal.

Still, the current picture of the labor market can only be described as remarkably resilient. Prior to the April labor report, weekly jobless claims remain historically low at levels just barely over 200,000, March personal income rose 0.5% which was in line with estimates and better than the +0.3% from February, and labor force participation remains near a recent high at 62.7%.

So, What’s Next?

We may sound like a broken record, but “data dependency” continues to be the phrase to take the over on if Vegas ever takes bets on FOMC meetings. The Friday jobs report certainly leaves the door open for at least one rate cut this year, but the Fed will ultimately want to see several more inflation prints before they gain the confidence to do so. If we see signs of a rapidly weakening labor market and slower wage growth on top of the disappointing first quarter GDP reading, we may begin seeing the tide shift back to more than only one expected rate cut this year.

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