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Investing.com -- A day after the Federal Reserve’s May meeting of the Federal Open Market Committee (FOMC), BofA analysts observed a muted market reaction, though it leaned slightly dovish.
The Fed, led by Chair Jerome Powell, indicated that future policy decisions would be guided by incoming data on inflation and economic growth, particularly in the context of recent tariffs.
With no immediate policy changes announced, the market pricing factored in a marginal increase in the likelihood of rate cuts over the next year.
The May FOMC meeting followed a March adjustment of economic projections, which saw the Fed lower its growth forecasts and raise its inflation expectations.
The risks to economic growth were seen as notably skewed to the downside, a sentiment that has been further underscored by increased uncertainty around the economic outlook, as noted in the May FOMC summary.
Despite the neutral stance of the May FOMC, market pricing remains dovish, reflecting expectations that the Fed will prioritize concerns over weaker growth over the risks of higher inflation.
BofA analysts noted that a slightly more accommodative monetary policy sentiment has resulted in a modest uptick in market pricing for Fed rate cuts within the upcoming 12 months.
The Fed’s cautious approach suggests that policymakers are in a wait-and-see mode, requiring more data before making any significant policy moves. This aligns with the Fed’s stance from the March FOMC meeting.
All-in-all, while the Fed’s May meeting did not provide substantial new guidance, the market’s pricing indicates a lean towards dovish expectations, with investors seemingly bracing for potential rate cuts in the face of heightened economic uncertainty and downside risks to growth.