The Fed held the policy rate steady during the latest FOMC meeting, leaving its benchmark rate in a target between 2.25% and 2.5% that may have disappointed the US president who earlier in the week urged the Fed to cut the rate by 1 percentage point. But the Fed set a lower interest paid on excess reserves that banks keep at the Fed to 2.35%, or 0.05 percentage point lower than before. The funds rate had been drifting to the top of its range, most recently trading at 2.45%. Banks currently hold US$1.56tril at the Fed, with all but US$1.41tril viewed as excess.

In summary, we believe the Fed is easing up its policy a bit. It lowered the cap on the amount of the Treasury’s proceeds that will roll off the balance sheet each month. Up to US$30bil had been allowed to roll, a level that will now decrease to US$15bil. The Fed’s balance sheet is currently just shy of US$3.9tril, most of which comprised the Treasury’s and mortgage-backed securities. The MBS roll-off will hold at US$20bil a month. While we maintain a “no change” stance to the policy rate for the rest of the year, we have, however, assigned a 60% chance of a rate cut by the end of the year.

• As expected, the US Fed held the policy rate steady during the latest FOMC meeting. The Fed held its benchmark rate in a target between 2.25% and 2.5%, possibly disappointing the US president who earlier in the week urged the Fed to cut the rate by 1 percentage point.

• The committee did, however, make a technical adjustment aimed at keeping the funds rate closer to the midpoint of the target range. Interest paid on excess reserves that banks keep at the Fed will now be set at 2.35%, or 0.05 percentage point lower than before. The funds rate had been drifting to the top of its range, most recently trading at 2.45%. Banks currently hold US$1.56tril at the Fed, with all but US$1.41tril viewed as excess.

• We found the Fed has tweaked some of the language on its view of the economy from the statement after the March meeting to indicate that growth remains strong. The Fed statement cited “economic activity rose at a solid rate” and job gains “have been solid” and so allowed the unemployment rate to remain low at 3.8%, which is around its lowest level in 50 years.

• On inflation, the Fed cited that “on a 12-month basis, overall inflation and inflation for items other than food and energy have declined and are running below 2 percent”. After the March meeting, the committee chalked up inflation weakness to lower energy prices.

• In summary, we believe the Fed is easing up its policy a bit. It lowered the cap on the amount of the Treasury’s proceeds that will roll off the balance sheet each month. Up to US$30bil had been allowed to roll, a level that will now decrease to US$15bil. The Fed’s balance sheet is currently just shy of US$3.9tril, most of which comprised the Treasury’s and mortgage-backed securities. The MBS roll-off will hold at US$20bil a month. While we maintain a “no change” stance to the policy rate for the rest of the year, we have, however, assigned a 60% chance of a rate cut by the end of the year.

Source: AmInvest Research - 2 May 2019