Federal Reserve Announcement Commentary
The Fed kept rates unchanged at the 3.50%-3.75% target, as expected, with a unanimous 12-0 vote. However, the Treasury flipped from an implied cut this year to an implied hike. The median year-end 2026 fed funds projection moved up to 3.8% from 3.4% in March. The “hawkish” implied hike sent stock markets down and bond yields up on the short to intermediate range of the curve.
This was Federal Reserve Chair Kevin Warsh’s first press conference. He emphasized the Fed’s commitment to price stability which did not indicate a dovish pivot as expected. Warsh also announced five task forces to review Fed operations, including communications, the balance sheet, data sources, productivity/jobs, and inflation frameworks.
Overall, we believe the economic backdrop still looks resilient, and the AI growth impulse still appears intact. A strong economy is usually good for earnings. But when inflation is still elevated, a strong economy can be bad for rate expectations. The market may demand more evidence that AI capex is translating into revenues, margins, and free cash flow – especially if the Fed is no longer providing the valuation tailwind of expected cuts.
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