Hold off on the Fed statement for a moment, Chair Powell's press conference was the real news today. He noted that both GDP and employment came in above expectations while inflation surprised to the downside. Inflation has become a recent bellwether for those trying to justify a rate cut. Powell addressed this head-on, stating that lower inflation appears due to transitory factors, and the Fed expects inflation to return towards the 2% target moving forward.

There was little change to the Fed statement itself, on net, with stronger language on economic activity and weaker language on inflation. Arguably the most dovish change came in noting that household spending and business fixed investment have slowed since the Fed last met. But here, too, Powell stated that signs already suggest this will move higher in the quarters ahead. In part, this improved forecasts comes from the global outlook, where growth prospects are improving, China trade negotiations appear nearly complete, and concerns about Brexit have been put on hold with the delayed deadline date. With virtually every comment, Powell tilted decidedly hawkish.

There were two other items of note from outside the statement. First, as was previously announced, starting tomorrow the Fed will begin to pare back the pace at which they let Treasuries roll off the balance sheet. As of April, the Fed was reducing the size of the balance sheet by $50 billion per month, of which $30 billion came from Treasury securities and $20 billion from mortgage securities. Moving forward, reductions in Treasury securities will be cut in half to $15 billion a month. Mortgage securities will continue to be reduced at a rate of $20 billion per month. This will continue until October, at which point the Fed will stop balance sheet reductions. Mortgage securities will continue to roll off at a pace of $20 billion per month, but those proceeds will be invested into Treasury securities, keeping the balance sheet size the same and simply changing the composition of assets.

The second item of note was the announcement that the Fed is reducing the rate of interest paid on excess reserves (IOER) to 2.35% from 2.40%. Before the press conference began, the financial media was pointing to this change as a sign the Fed is preparing for a rate cut. Cue Powell once again, stating that the change to the IOER rate is in no way representative of a change in policy stance. In December of last year, the Fed increased the Fed funds rate 25 basis points but only moved the IOER higher by 20 points, essentially making the same 5 point cut announced today. These are simply tweaks as the Fed learns how best to manage rates with large excess reserves in the system.