On May 1st, the Federal Reserve concluded its two-day monetary policy meeting, announcing that it would keep the target range for the federal funds rate unchanged at 5.25% to 5.5%. Additionally, it stated that starting from June, it would slow down the pace of reducing the balance sheet.

So far, within this tightening cycle that began in March 2022, the Federal Reserve has refrained from raising interest rates for six consecutive meetings.

However, compared to the rate decision in March, a highlight of this decision is the announcement of the slowing down of the balance sheet reduction. The announcement stated that starting from June, the Federal Open Market Committee (FOMC), responsible for open market operations, will reduce the monthly cap on the reduction of U.S. Treasury securities from $60 billion to $25 billion. At the same time, the committee will maintain the monthly cap on the reduction of agency debt and agency mortgage-backed securities at $35 billion, and any principal exceeding this cap will be reinvested in U.S. Treasury securities.

This means that the Fed has cut the monthly planned reduction cap of U.S. Treasury securities by more than half. Some comments suggest that the Fed's announced reduction of $35 billion exceeds Wall Street's expectation of $30 billion.

Furthermore, the statement reiterated that in assessing the appropriate stance of monetary policy, the Federal Reserve will continue to monitor the impact of incoming information on the economic outlook. If risks emerge that could hinder the achievement of its goals, the Federal Reserve will be prepared to adjust the stance of monetary policy accordingly.

At the press conference, Powell mentioned in his speech that although inflation data shows some signs of easing, there has been a lack of further progress in achieving the 2% inflation target in recent months. He emphasized that the Federal Reserve must remain vigilant in achieving the inflation target and be prepared to adjust the stance of monetary policy when necessary.
Powell also stated that despite some signs of easing in inflation data, there has been a lack of further progress towards the 2% inflation target in recent months. Powell acknowledged that the time required to gain confidence for a rate cut may be longer than previously expected, indicating that the Federal Reserve remains highly alert to inflation issues and may need more time to assess the sustainability of inflation.

Regarding the recent market concerns about "further rate hikes," Powell said it is "unlikely." However, he also stated that if he believes it is necessary to adjust the monetary policy stance in the future, he would do so.
Regarding the timeline for rate cuts, Powell said at the beginning that recent data has not given the Fed "greater confidence" to cut rates (greater confidence), and the time to achieve greater confidence may be longer than previously expected. When a reporter asked, "Will there be a rate cut this year?" Powell responded, "I don't think about the problem in that way; we didn't see progress in improving inflation in the first quarter, which means it may take longer, but I don't know exactly how long it will take." He also believes that a rate cut will only be considered when "confidence" is achieved. As for the specific conditions for a rate cut, Powell gave an example, saying that if employment is strong and inflation is more persistent, the Federal Reserve would delay a rate cut; but if inflation falls or there is an unexpected cooling of employment, a rate cut might be considered.

Overall, Powell's speech this time was perceived as "doveish" by the market. In the face of the fact that inflation has rebounded for three consecutive months beyond expectations in the first quarter, on the one hand, this statement only stated that "progress towards the 2% inflation target is lacking," which is somewhat too mild a description of the rebound in inflation; on the other hand, when speaking, Powell downplayed concerns about "further rate hikes," and after eliminating the "worst-case scenario," the market may regain expectations for rate cuts. In addition, the announcement of slowing down the balance sheet reduction at this meeting is an operation that objectively protects liquidity and may also contribute to the market's dovish sentiment. According to CME data, after the Federal Reserve's May meeting, the market estimates the probabilities of no rate cut, one rate cut, and two or more rate cuts (or more) within the year as 15.8%, 42.7%, and 41.5%, respectively.

Interestingly, just after Powell finished his speech, the U.S. Bureau of Labor Statistics released a disappointing employment report. The U.S. April non-farm employment report showed that the U.S. April seasonally adjusted non-farm employment population increased by 175,000 people, the lowest increase since October 2023, which was below the expected 243,000 and the previous value of 303,000. The U.S. April unemployment rate unexpectedly rose to 3.9%, with the market expecting it to remain unchanged at 3.8%. The U.S. April average hourly earnings rate was recorded at 0.2%, lower than the expected and previous 0.3%. After the non-farm data was released, U.S. interest rate futures currently predict that the Federal Reserve will cut rates twice by 25 basis points in 2024, compared to the expectation of once before the non-farm data. Traders have brought forward the expectation of the first rate cut by the Federal Reserve from November to September.
Dan Suzuki, Deputy Chief Investment Officer of Richard Bernstein Advisors, believes that this is a very market-friendly employment report. It generally indicates that employment growth is slowing down moderately, but it is not collapsing, which helps to reduce wage pressure. At the same time, employment and working hours in the manufacturing sector are very stable, indicating that a part of the economy continues to receive solid support.

Attachment: The full text of the Federal Reserve's May interest rate meeting statement.