BOSTON, MA, May 3, 2023 — The Federal Open Market Committee (FOMC) met on May 3, 2023 to assess the state of the U.S. economy and monetary policy.

What We Learned

For the third time this year, the FOMC raised the Federal Funds Target Rate (fed funds) by 25 basis points (bps), a signal to markets that the FOMC remains committed to its inflation mandate. The target band now stands at 5.00-5.25%. Markets largely expected the move, given recent inflation data. During the month of April, FOMC participants noted on many occasions the importance of the inflation mandate as well as the effects of tighter credit conditions on the economy. With employment data demonstrating some cooling, the effects of previous monetary actions and tighter credit conditions may be moving the economy in the Fed’s desired direction. The Fed also seeks to avoid a premature easing of financial conditions in order to achieve its inflation objective. This was evident in today’s policy statement and outlook.

• The market currently reflects a high probability of no change in fed funds increase at the next FOMC meeting on June 14.
• The market expects that we have now achieved peak fed funds for the cycle to be followed by a brief pause, and then a reversal with fed funds at 4.25-4.50% by year end.
• Normalization of the Fed’s balance sheet via Quantitative Tightening (QT) continues at the previously stated maximum monthly cap of $60bn of U.S. Treasury securities and $35bn of agency mortgage-backed securities. QT reduces the amount of reserves in the banking system leading to reductions in money supply and market liquidity, further supporting the Fed’s goal of slower economic growth and lower inflation.

The FOMC altered their statement to reflect the uncertainty of the policy outlook as well as provide flexibility should inflation persist above target. The statement notes that the Committee understands the impact of prior policy actions on current and future economic outcomes. The FOMC “will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.” Similarly, Chair Powell emphasized in the press conference that the Committee remains highly attentive to inflation risks, future policy decisions will be data dependent, and the banking system is sound and resilient.

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