Fed holds the line but tapers the taper

As expected, the FOMC today kept the Fed funds target unchanged at 5.25 - 5.5 percent, while clearly suggesting that it is still some way from being ready to start an easing cycle. It also significantly reduced the pace of its quantitative tightening program, presumably in order to prevent the possible emergence of a liquidity squeeze. 

The phraseology of the media release its in many respects similar to what we have been seeing for the past several months:  "economic activity has continued to expand at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated" . However, the very first paragraph ends with a new and unequivocally bearish warning: "In recent months, there has been a lack of further progress toward the Committee's 2 percent inflation objective".

Given that warning, it is no surprise that the media release goes on to say, as usual, that "The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent".  There is no new "dot plot" for analysts to pore over this time, but with a June rate cut now apparently off the table, it seems certain that the consensus of FMC members is now looking for something much smaller than the 75 basis points of easing that was previously forecast for the remainder of 2024. The outlying view that there might be no rate cuts until 2025 no longer seems so improbable.

There have been growing concerns in fixed income markets that the rapid pace of the Fed's quantitative tightening (QT) might lead to liquidity issues in the banking system. Today's announcement that the QT for Treasury securities will be cut from $60 billion/month to $25 billion per month should allay these fears. However, this is the only remotely bullish thing about today's announcement. Fears that the Fed might actually have to start raising rates again seem overblown, but for now, the easing cycle seems sure to start later and be more gradual than markets were hoping.