Fed Skips May and Looks to June

The Federal Reserve dislikes surprising the market and it refrained from doing so today.  Policy was unchanged and the Fed saw the weakness in Q1 as being transitory.  There were no dissents and no fresh insight into its balance sheet strategy.  

The Fed also looked past the weakness in the March non-farm payrolls report, noting that the labor market continued to strengthen in the face of slower growth.  It recognizes the pullback in consumption (calling it modest rather than moderate), but opined that the fundamentals for consumption (employment and income?) were "solid."  The FOMC statement recognized that inflation was not accelerating but on a 12-month basis was close to the 2% target.   

Outside of these modest tweaks the statement was largely the same as in March.  By referring to the weakness in Q1 as transitory, this is the closest to a hint we have that a June hike remains a strong possibility.  The June Funds funds future is implying 100 bp effective Fed funds at the end of June.  Fair value, assuming that the Fed funds average 116 bp on a 25 bp hike and falling to 107 bp on last day of the quarter, would be 104 bp.  That is the current pricing in about a 76.5% chance.  The CME estimate the odds at 71.6% chance, while Bloomberg say interpolate the odds at almost 94%.  

The US dollar firmed slight, especially against the yen where news highs for the session were recorded.  The euro whipsawed but is net-net little changed from prior to the FOMC statement.  The US 10-year yield firmed to poke through 2.30%.  

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