As universally expected, the Fed did not hike rates at the May meeting. Instead, the FOMC committee issued a boilerplate Press Release that the first quarter slowdown is transitory and that inflation expectations are balanced.

Key Snips

The Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

June Rate Hike Expectations Up Again

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Bond Market Reaction

• The yield on the 2-year and 5-year treasury notes rose a relatively sharp four basis points.
• The yield on the 10-year treasury rose 2 basis points.
• The yield on the 30-year long bond fell 2 basis points.

This action, if it holds, is indicative of a bond market that sees the Fed hiking the US into recession.

Transitory Weakness

1. April 5: Don’t Worry Weakness is Transitory: Fed Expects a Second Quarter Rebound, Higher Equity Prices
2. May 2: Auto Sales Puke Again: Year-Over-Year Totals: GM -6%, Ford -7.2%, Toyota -4.4%, Fiat-Chrysler -7.0%
3. May 1: Consumer Spending Flat, PCE Inflation Weakest Showing In 16 Years, Rate Hike Odds Rising