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Fed Keeps Rates Steady, Grows Cautious on Inflation; Gold, USD, Yields Await Powell

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FOMC DECISION – APRIL 30- MAY 1 MEETING

  • The Fed holds interest rates steady at the end of its April 30-May 1 meeting, in line with expectations
  • Forward guidance in the FOMC statement remains unchanged but the inflation characterization was tweaked
  • Gold and the U.S. dollar have consolidated their pre-announcement bias as traders await Powell’s presser

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The Federal Reserve on Wednesday kept borrowing costs unchanged in a range of 5.25% to 5.50% after ending its April 30-May 1 gathering, just as expected. The decision to stand pat for the sixth straight meeting, taken unanimously, is part of the current strategy of allowing restrictive monetary policy to work through the financial conditions channel to ease demand in pursuit of lower consumer price growth.

Two years ago, the Fed initiated one of its most aggressive hiking campaigns in decades to tackle red-hot inflation, delivering 525 basis points of rate increases in the process. While these measures have succeeded in curbing the skyrocketing cost of living, progress on disinflation has faltered in 2024, with core PCE running at a 4.4% annualized rate over the past three months, more than double the target.

On quantitative tightening, the Fed announced plans to start tapering in June the program by which it gradually reduces its balance sheet. According to the details, the monthly pace of runoff will be cut from $60 billion to $25 billion for Treasury securities, but the existing cap on agency mortgage-backed securities will stay the same for now.

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Focusing on the policy statement, the central bank maintained a constructive view of the economic outlook, acknowledging that activity has been expanding at a solid pace and that the unemployment rate remains low amid strong job creation. Meanwhile, the FOMC noted that consumer prices have eased over the past year, but warned that progress on disinflation has hit a snag, signaling mounting concerns regarding upside inflation risks.

In terms of forward guidance, the committee stated that it “does not expect it will be appropriate” to dial back on policy restraint “until it has gained greater confidence that inflation is moving sustainably toward 2%”. This echoes the message conveyed in March and signals little appetite to pivot to a looser stance soon, possibly implying that the first-rate cut of the cycle may not occur until September or December.

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MARKET REACTION AND IMPLICATIONS

No fresh macroeconomic projections emerged from this meeting; the next batch is scheduled for June, but Powell is likely to provide further clarity on the central bank’s forthcoming actions during his press conference. Meanwhile, gold and the U.S. dollar have consolidated their pre-announcement bias after seesawing a little bit, but with price swings largely contained. Volatility, however, could pick up once Powell starts speaking at 2:30 pm ET.

US DOLLAR, YIELDS AND GOLD PRICES CHART

Source: TradingView

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