On the May FOMC

Higher inflation in Q1 is characterized as “lack of further progress,” not “acceleration.” Markets were already braced for fewer than two rate cuts this year, and this language rules out any rate hikes. As hinted, the deceleration of run-off of balance sheet assets was announced, with onset in June. The cap for run-off of Treasuries will be lowered from $60 billion to $25 billion per month. The new cap is lower than we expected – the closest thing to a bullish surprise from this meeting – even lower than the $30 billion cap when QT began. The $35 billion cap for MBS remains in place, but since onset it has never even been close to binding. Stocks are higher than they were in December when seven cuts were expected, now with fewer than two. Markets see the neutral rate is higher than previously thought, so the Fed is not excessively tight. Deceleration of QT is good for sentiment, but in reality QT isn’t really tightening.