The FOMC hiked the target range of Fed funds rate by 25bps to 5%-5.25%. This was in line with our expectations after the March statement. The backdrop to yesterday’s policy decision was same as the previous one – a failed bank and healthy economic data. After the March 2023 meeting, a significant share of market participants had anticipated a pause in the May 2023 meeting in the light of collapse of SVB and Signature Bank. However, subsequent healthy economic data and contained US banking system stress led the market to factor in a 25bps hike for this meeting. The Fed has now increased its policy rate by 500bps in little over a year.

They key change from the March statement was removal of “some additional policy firming may be appropriate”. This was replaced with “In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.” This change, as Fed Chair Powell pointed out is meaningful, and essentially signals a pause. Recently, US Treasury Secretary Janet L. Yellen has warned lawmakers that the United States could run out of cash by June 1 if the borrowing cap isn’t raised or suspended. The Fed Chair in his press conference mentioned that while hitting the debt ceiling could have unexpected and adverse consequences on the US economy, it was not an important factor in the Fed’s monetary policy decision and outlook.