On the May FOMC

As expected in markets, the funds rate was hiked to 5-1/8%. The statement language eliminated the phrase that “the committee anticipates further policy tightening.” In the presser, Powell affirmed that this means a pause. The statement said, and Powell reiterated that the banking system is “sound and resilient,” but he also that that improvements in regulation are necessary to make it sound and resilient. Powell said the timing of the first rate cut will be contingent on seeing inflation tangibly fall. He gave some, but only weak, acknowledgement that inflation is already falling – many components to levels already below the Fed’s target. After the meeting, markets now assign a small probability to the first cut coming as soon as June, with virtual certainty that there will be four 25 bp cuts by January.