Central banks are supposed to set policy in a forward-looking manner, taking into account what is observable in the economy and what is likely to transpire. This hasn’t been the case in recent years, where the mode of operation has been more data dependent. Based on that, market participants believed that today’s FOMC meeting would deliver a verdict of no change in rates, but perhaps offer guidance that there is a better chance of seeing rate cuts over the remainder of the year.

 

 

Why? Because this morning’s U.S. CPI report came in softer than expected, reinforcing hopes that inflation truly is being brought under control.  Yes, the Fed held its fed funds target range unchanged at 5.25-5.5%, but the so-called “dot plot” showed that officials believe there will only be one rate cut this year.  That compares to expectation of two cuts at the previous meeting in March. In fact, four officials expect no change in rates this year. On the surface, this apparently hawkish shift seems to contradict the language in the statement, where it now says that there has been “modest further progress towards the committee’s 2% inflation objective”, versus the previous language that highlighted a lack of progress.

 

 

If this statement had occurred without this morning’s CPI data, we would probably be talking about disappointment in both the bond and equity market this afternoon. Instead, markets were holding their ground after the release of the statement, and I would suggest this is because the data trumped the dot plot. Chair J. Powell made an interesting comment during the Q&A when asked if officials took into account this morning’s CPI report and he answered that in terms of adjusting forecasts for rate changes, most officials generally don’t.

 

Despite the fact that Fed officials are sticking to the higher for longer playbook, suggesting that we might have to wait until December for the sole cut, if the May CPI report (due before the Fed’s next meeting at the end of July) repeats the softness seen today, then I would still not rule out a move either at that meeting or September.  As I mentioned in yesterday’s conference call, the labour market is weaker than what last Friday’s payrolls numbers and if we see a further fade in the June numbers, this would also reinforce a need for cuts sooner than later. Ally and I continue to expect two rate cuts before the end of the year and if the data over the coming weeks supports that, then both equities and bonds will likely have a constructive summer.  That said, this is not a summer where you can take your eyes off the ball.

 

On behalf of the Pyle Wealth Advisory team, have a wonderful rest of the week.   

Andrew Pyle

 

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Andrew Pyle is an Investment Advisor with CIBC Wood Gundy in Peterborough. The views of Andrew Pyle do not necessarily reflect those of CIBC World Markets Inc.

 

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