Key takeaways from May FOMC decision

The Fed has kept rates steady for its past five meetings, and today continued that trend.

The Federal Open Market Committee (FOMC) noted a "lack of further progress" in recent months in reaching the Fed's inflation goal. The Fed has made clear that it needs greater confidence to enact a rate cut. We hold out hope it will get that in data in the coming months.

It is important to note that the guidance paragraph of the FOMC statement did not change from the previous iteration. We see it as a good sign that their language didn’t become more aggressive.

Fed Chair Jay Powell reiterated in his press conference that it will take longer for the FOMC to become confident enough to cut rates. That's OK. We still believe it won't take very long to get more confident.

The S&P 500 Index went up after the announcement. We think that speaks to the Fed's thoughtfulness and measured perspective — that it is not over-reacting to recent disappointing inflation data.

All in all, this was a rather dovish FOMC announcement and press conference, especially given market expectations (and our expectations). 

As long as the Fed’s assessment that policy remains restrictive and that underlying inflation remains below the 3% level then further hikes are off the table (chart). The market may have rightly priced in 1 rate cut closer to the end of the year, which should be base case. 

Further cuts would require better disinflationary data. For now, it seems that even if the inflation data in Q2 remains elevated, but not as hot as in Q1, then the Fed is going to be passive and rates are likely going to be higher for longer. The USD is likely to be strong. 

Impact on Asian markets 

We believe that this FOMC meeting was important to Asian investors.

Asian market participants could heave a collective sigh of relief that Chair Powell signalled during the press conference that the Fed retains an eventual easing bias and with that, a low possibility of another rate hike. The continued easing bias by the Fed is a welcomed development for Asian risk assets. 

Certainly, a further hike in the Fed’s policy rates could present a headwind for Asian assets and so by Powell removing that possible left tail risk of a rate hike is perhaps the most important takeaway from the May FOMC meeting. 

Outlook 

As Asian investors digest this new dynamic, Asian risk assets could continue to perform well. Global growth, led by the US, appears to be re-accelerating, which is positive for the Asian economies and markets. 

Asian investors would much rather have this dynamic versus a scenario where US rate cuts are instituted because growth is faltering.  

The APAC region does not suffer from elevated levels of inflation, though their central banks may be forced to keep rates higher for longer, along with the Fed. 

We don’t see any Asian economies that are desperate for a domestic rate cut. 

The most pressing concern for a higher for longer, could be stiff headwinds facing local Asian currencies from a resurging USD. This could certainly make the job for Asian central banks much harder until we get a Fed pivot.  

Going forward, all eyes have moved on to what the next few monthly inflation prints are going to look like in the US. 

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.