The US Federal Open Market Committee (FOMC) held the Federal Funds Rate steady in the 5.25-5.50% target range at the May 2024 meeting. The Fed reduced the pace of quantitative tightening to $60 bn from $95 bn earlier.  At the press conference, Powell reiterated that monetary policy is “restrictive” and that an interest rate hike is “unlikely.”

US economic growth has been surprisingly strong despite higher interest rates. Analysts have revised 2024 growth forecasts from about 1.3% in Jan’24 to 2.4% in Apr’24. The Atlanta Fed Nowcast suggests Q2CY24 GDP growth at a healthy 3.3% seasonally adjusted annual rate. The FOMC statement also notes that recent indicators suggest that economic activity has continued to expand at a solid pace.

The FOMC statement highlights that, in recent months, there has been a lack of further progress toward the 2 per cent inflation objective. Inflation has turned out to be stickier than expected. US CPI inflation printed at 3.5% YoY in Mar’23, higher than the 3.2% YoY increase in February and slightly exceeding the market consensus of 3.4% YoY. The Fed’s preferred measure, core PCE printed at 2.8% YoY in March, higher than the market expectation of 2.6% YoY.

Labour market conditions are gradually easing, as evidenced by fewer job openings and a decline in the quits rate. However, job gains remain strong, and the unemployment rate remains low. The FOMC continues to await further weakening of labour market conditions.

The Fed seems prepared to maintain interest rates at current levels until adequate progress is achieved on the inflation front. Markets now expect 1-2 rate cuts in 2024, significantly lower than the 4-5 rate cuts expected at the beginning of the year.

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