On the May FOMC

After Trump’s call for a rate cut and new QE based on “wonderfully low inflation,” the FOMC only reports “muted inflation pressures,” the same language used in the prior meeting. The 5 bp cut in IOER is only a technical adjustment as the Fed learns to use this new policy tool. Trump’s inflation argument is not out of the mainstream, yet because it is he who made it, Powell seems compelled to push back against it – though he remains “patient” in compliance with the deal he cut with Trump in December. Trump’s call for a rate cut has already been reflected in the curve all year. If inflation remains this low, the consensus will come around to Trump’s view and Powell will have little choice but to cut rates.