No Surprises Here…Fed Keeps Rates Intact

Drum roll please….And the Federal Reserve’s Open Market Committee’s decision about interest rates? No go.

That likely doesn’t surprise market watchers who have been following the CME’s FedWatch Tool, which has predicted with a 95% probability for some time now that today’s Fed decision would be a nondecision. Bingo.

But what about a step up by June? Hard to say, based on the Central Bank’s statement. Sticking with the “gradual pace” of tightening that Chair Janet Yellen has advocated for some time, the Fed statement noted softness in the economy and the slowdown in household spending, but signaled a stay-the-course position on monetary policy.

“The committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2% over the medium term,” according to the statement.

The statement failed to give any clear hints about when the Fed might up interest rates next, noting that it believes that “economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate,” adding that “the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”

The Fed said earlier this year that it expects to raise rates at least two more times this year, maybe even three, but didn’t mention number of times today. It is not uncommon for the Fed to stay away from issuing any kind of commitment statement during a Fed meeting.

The FedWatch tool, a measure of Fed Funds Futures, had a near 70% probability of a rate increase by June ahead of today’s meeting. After the announcement, those odds were unmoved.

But remember this: In its February statement, there was nary a clue to a raise in rates in March. But in the following weeks before that March meeting, Fed policy makers were all singing the same chorus that a hike was on the table for March, when rates were bumped up 25 basis points to 0.75%-1%.

Today’s statement did make mention of inflation, a measure the Fed watches closely and has targeted at 2%, which it had actually hit in February. But since then, the economic numbers the Fed so closely watches have softened. March saw core inflation slip, blamed mostly on tough competition that led to reduced prices on cellular services, and the drop in sales of new and used cars. Seasonality, of course, appears at play here, analysts have pointed out­­–remember the snow storms in the northeast–and one month does not make a trend.

The Fed made mention of the fall back in consumer prices in March and that inflation dipped below that 2% target, but also noted that though consumer prices rose only modestly, the “fundamentals underpinning the continued growth of consumption remained solid.”

Next up on the Fed agenda is a June meeting, which the Fed reminds us is “live.” Between now and then, the Fed will see two more official jobs reports. Today ADP reported that its tally of private-sector hiring has slowed down to 177,000 in April after a March downward revision. The Commerce Department numbers, out on Friday, of course, are more inclusive than ADP because they add government positions to the count. But the ADP report gives us a good first-see of what might be expected, though many market participants tend not to put too much weight on those numbers.

And the Market Response?

A whole lot of nothing. The S&P 500 (SPX), which has been trading in a tight range in the last week, was narrowly lower ahead of the announcement and barely budged after. Ditto for the Dow Jones Industrials (DJX) and the Nasdaq (NDAQ).

The Volatility Index (VIX), the market’s fear gauge, has been at historically low levels, even dipping below 10 in recent sessions, suggesting that the markets aren’t terribly jumpy about direction. Ahead of the announcement, the VIX was up 3%, flirting with 11, and stayed there afterward

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