Federal Reserve Holds Interest Rates Due to Economic Uncertainty
The Fed kept its key interest rate on hold in line with market expectations. Messages from Fed officials in the decision statement highlighted that the expected developments in inflation have not materialized. The Fed also announced to slow down the pace of reducing the balance sheet. In his post-decision remarks, Powell indicated that the Fed would continue to monitor data for the timing of rate cuts. At the same time, he signaled that a rate hike was off the table as the next step. Powell noted that progress toward the committee's 2% inflation target has not been made in recent months. In other words, Fed officials did not indicate that a rate hike was under consideration. In addition, they conveyed messages in the policy statement about plans to slow the pace of reduction in the central bank's asset portfolio. Accordingly, the Fed will reduce the monthly flow into Treasury securities from $60 billion to $25 billion starting in June. This cut aimed to reduce the risk of financial market turbulence observed during the previous balance sheet reduction in 2019.
On the macroeconomic data front, the US ISM Manufacturing PMI fell to 49.2 in April, down 1.1 points from the previous month, signaling a contraction in the manufacturing sector, compared to expectations of a reading of 50. The production index fell 3.3 points to 51.3 in April, and the new orders index fell 2.3 points to 49.1. On the other hand, the employment index increased by 1.2 points to 48.6. The US Department of Labor released the JOLTS job openings data for March, which showed a decrease of 325,000 from the previous month to 8.488 million. This was below expectations of 8.680 million job openings.
The most interest rate-sensitive US 2-year Treasury yield fell to 4.95%, while the US 10-year Treasury yield fell to 4.61%. The VIX index rose to 15.38.
In the Asia session, following the Fed's decision, the Japanese yen strengthened sharply, giving the impression that the authorities re-intervened in the currency. During low trading periods, the Japanese yen surged by approximately 3% against the dollar, reaching 153 for USD/JPY. After the Asian trading session commenced, the yen's gains were reversed, and USD/JPY rebounded above the 156 level.