A hawkish Fed hold
As expected, the Fed left interest rates unchanged (at 3.5% to 3.75%) at the conclusion of its two-day monetary policy meeting, the first under the new Chair, Kevin Warsh. In its policy statement, which was considerably shorter than previous statements, the Fed noted that “economic activity is expanding at a solid pace” (and) ‘inflation remains elevated”. The statement refrained from giving any “forward guidance” on interest rates – which will be the new norm under Warsh – but said the Fed will return inflation to the 2% target, a point Warsh repeated a number of times at his post-meeting press conference. This resulted in a firming of rate hike expectations with the market now fully pricing in a 25bps increase by October, in turn triggering a rise in US bond yields, a fall in US stocks, and a strengthening of the dollar. EURUSD and GBPUSD are both circa one cent lower relative to pre-meeting levels, trading at around $1.1510 and $1.33 respectively this morning, while EURGBP is little changed at about £0.8650. Attention today turns to the Bank of England’s (BoE) latest interest rate announcement. It is expected to stay on hold at 3.75%, so the focus will be on how many dissenting votes there are in favour of an immediate rate hike.
US government bond yields spiked higher following the Fed meeting, led by the short end of the curve with 2-year yields closing up almost 15bps on the day. German and UK yields had earlier closed marginally higher and marginally lower respectively, though both are edging higher this morning following the move up in US yields. In equity markets, US stocks reversed early (modest) gains to finish lower on the day, with the S&P 500 shedding just over 1%, while European stocks chalked up gains of just shy of 1%. The futures markets point to gains for both today, probably helped by Trump’s announcement that he has signed a ‘peace’ deal with Iran.
UK labour market data released earlier this morning shows the unemployment rate nudged down slightly to 4.9% in the three months to April, while the annual rate of growth in private sector regular weekly earnings eased to under 3% for the first time since late 2020. The latter follows yesterday’s softer than expected CPI data, which showed headline inflation unchanged at 2.8% in May.
The Fed’s updated Summary of Economic Projections (SEP) showed sizeable upward revisions to forecasts for headline and core PCE inflation – the target measure of inflation – this year, to 3.6% and 3.3% respectively from 2.7% for both previously, but minor revisions to forecasts for growth and unemployment. The interest rate ‘dot plot’ – which may not survive under the Warsh Fed – showed 8 of 18 members favoured keeping interest rates unchanged over the remainder of this year while 9 pencilled in at least one quarter-point rate hike by year-end.
Looking to today, along with the BoE rate decision, the Makerfield by-election takes place in the UK – a victory for Andy Burnham would pave the way for a challenge to Keir Starmer’s leadership of the Labour Party – while economic data due include the regular weekly jobless claims in the US and construction output in the Euro area.