PrefBlog

To celebrate International Workers’ Day, let’s have a look at the word “additional” in the FOMC statement of April 29, 2026.

To review:

On Wednesday, its latest forward guidance hinted that lower interest rates might be the only possibility moving forward, noting it will consider “additional adjustments to the target range for the federal funds rate.” In its latest move, the Fed this week kept its key interest rate unchanged for the third consecutive meeting.

The word “additional” specifically drew objections. Fed presidents Lorie Logan of Dallas, Beth Hammack of Cleveland and Neel Kashkari of Minneapolis “did not support inclusion of an easing bias in the statement at this time,” according to the Fed on Wednesday, so all three of them cast dissents. The three Fed presidents released statements Friday detailing why that was a mistake.

Dallas Fed President Lorie Logan’s statement says:

At this week’s Federal Open Market Committee (FOMC) meeting, I supported the decision not to change the target range for the federal funds rate. However, I dissented from language in the post-meeting statement that suggests the next adjustment to the target range will most likely be a cut.

The statement says: “In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.” This language evolved out of the series of three rate cuts the FOMC made last fall. In that context, “additional adjustments” implies the next rate change, whenever it occurs, will most likely (though not certainly) reduce the target range again. I disagree with that assessment of the policy outlook.

I am increasingly concerned about how long it will take inflation to return all the way to the FOMC’s 2 percent target. Congress charges the FOMC with setting monetary policy to achieve maximum employment and price stability. The FOMC has repeatedly reaffirmed that personal consumption expenditures (PCE) price inflation of 2 percent is most consistent with those mandates. Yet PCE price inflation has exceeded 2 percent for more than five years. To forecast where headline inflation is headed, I look to measures of inflation that strip out extreme price changes or categories where prices are more volatile. Even before recent increases in the prices of energy and other commodities, those measures had been running meaningfully above 2 percent, leaving doubts about how long it will take inflation to return to target. The conflict in the Middle East raises the prospect of prolonged or repeated supply disruptions that could create further inflationary pressures. At the same time, the labor market has been stable, with low unemployment and payroll job gains keeping pace with labor force growth.

The economic outlook is highly uncertain, however. The inflation outlook could improve if tariff-related price increases subside, housing prices continue to soften and commodity supply disruptions resolve quickly. On the other hand, inflation could remain stubbornly high. The labor market could strengthen or weaken amid the crosscurrents of changes in trade patterns, technology, energy costs and immigration. Depending on which of these scenarios materialize, it could plausibly be appropriate for the FOMC’s next rate change to be either an increase or a cut.

When the FOMC gives forward guidance about the likely course of future interest rates, as in the recent post-meeting statement, that guidance is an important policy tool. It influences financial conditions and the economy, and it affects the achievement of the FOMC’s maximum employment and price stability goals. Equally, households and businesses rely on the guidance to make future plans. When the FOMC gives forward guidance, it is important for that guidance to reflect the policy outlook. In light of the two-sided risks to monetary policy, I believed the FOMC should not give forward guidance implying a bias toward rate cuts at this time.

Federal Reserve Bank of Minneapolis President and CEO Neel Kashkari’s statement is much longer (with charts!) and says in part:

I supported the Federal Open Market Committee’s (FOMC) decision to hold the federal funds rate at this week’s meeting,1 but I dissented against the FOMC’s action because I did not think it was appropriate to continue to include the following phrase in the policy statement: “In considering the extent and timing of additional adjustments to the target range for the federal funds rate …”

While that phrase is not a commitment to make further cuts to the policy rate, it is widely interpreted by Fed watchers to indicate the Committee’s expectation that the next adjustment to the federal funds rate would be a cut. I consider this language a form of forward guidance about the likely direction for monetary policy. Given recent economic and geopolitical developments and the high level of uncertainty about the outlook, I do not believe such forward guidance is appropriate at this time. Instead, the FOMC should offer a policy outlook that signals that the next rate change could be either a cut or a hike, depending on how the economy evolves. Forward guidance is itself an instrument of monetary policy: It can influence financial conditions today, potentially slowing or hastening the achievement of our dual mandate goals.
…
Prior to the conflict in the Middle East, even though inflation had been above our target for almost five years and was still too high (as shown in Figure 1), I felt fairly confident that core inflation was headed back to our 2 percent target. Tariffs had clearly pushed up goods inflation, but that increase likely would have waned during 2026 as prices fully adjusted to the new tariff regime. Research by Minneapolis Fed economists indicated that housing services inflation was well on its way back down, with new leases having fallen to low levels and the slow process by which those new leases translate into housing services inflation being well understood. That only left nonhousing services inflation, which should be tied to wages, and wage growth continued to cool. Finally, I was somewhat comforted by the fact that both market and survey measures of long-run inflation expectations appeared well anchored at our 2 percent target (see Figure 2).

Meanwhile, the labor market appeared lukewarm but largely stable with the unemployment rate having hovered around 4.3 percent since May 2025, somewhat above my estimate of the rate consistent with maximum employment (see Figure 3). We had been in a low hire, low fire environment for some time.

Thus, while we appeared to be modestly missing on both sides of our dual mandate, I had more confidence that inflation was headed back to target than that the labor market was on track to reach maximum employment. Given that I viewed policy as mildly restrictive, some further cuts to the federal funds rate would likely be appropriate over time. Hence, I supported including the “additional adjustments” language in the policy statement, and my December and March Summary of Economic Projections (SEP) indicated one more 25 basis point cut in 2026. The conflict in the Middle East had just begun when the FOMC met in March; hence, it did not yet lead me to adjust my outlook since it was unclear how long the conflict would last and how severe any potential disruptions would be.

Although there are many potential economic scenarios that could result from the Iran war, for monetary policy, I am focused on two primary ones:

The first scenario is a fairly quick reopening of the Strait of Hormuz. Financial markets appear to be adopting this scenario as their base case, as indicated by oil futures, which expect prices to fall to around $88 by year-end 2026. Even in this more benign scenario, Blue Chip forecasters expect core inflation (PCE) to be 3 percent this year (up from an expectation of 2.7 percent as of January). If they are right, core inflation will have been at roughly 3 percent for three years in a row. Such a meaningful inflation shock could put downward pressure on spending in the U.S. as consumers are forced to cut back on less-essential purchasing, potentially pressuring the U.S. labor market. In such a scenario, I could imagine the optimal monetary policy response to be holding rates where they are for an extended period and then easing only gradually, once the inflation shock has begun fading, having proven to be transitory.

The second scenario is more concerning, with an extended closure of the Strait of Hormuz and potentially further damage to energy and commodity infrastructure in the Middle East. If this were to happen, the price shock wave could be much larger than is currently expected, driving up both inflation and unemployment in the U.S. With inflation having been elevated for almost six years and counting, I believe the FOMC would have to take very seriously the risk of an unanchoring of long-run inflation expectations. While financial market indicators suggest expectations are anchored today, I believe those signals assume both a more benign war scenario and an FOMC that is committed to defending that anchor. Hence, we likely would have to follow through with a strong policy response to vindicate those expectations. Federal funds rate increases, potentially a series of them, could be warranted, even at the risk of further weakness to the labor market. I firmly believe that anchored long-run inflation expectations are necessary for achieving maximum employment and a vibrant economy.

Given the uncertainty about the path of the conflict and the resulting effects on inflation, employment and economic growth, I believe the FOMC should offer a policy outlook that signals that the next rate change could be either a cut or a hike, depending on how the economy evolves. This could tighten financial conditions somewhat today, pushing back against a high-inflation scenario that could require an even stronger monetary policy response in the future.

Federal Reserve Bank of Cleveland President Beth Hammack’s statement states:

Uncertainty around the economic outlook has increased in 2026 and makes the future path for monetary policy more uncertain, as well. At this week’s FOMC meeting, I supported holding the federal funds rate steady. I dissented from the post-meeting statement because I did not believe it was appropriate to include an easing bias around the future path for monetary policy. The current FOMC statement references language around “additional adjustments.” This forward guidance was put into the statement to signal a pause rather than an end to the easing cycle. I see this clear easing bias as no longer appropriate given the outlook.

Activity in the US economy has been resilient thus far in 2026, and the unemployment rate has been little changed near my estimate of full employment since last summer. Inflation pressures continue to be broad based, and rising oil prices present an additional source of inflationary pressure. Uncertainty around the economic outlook is elevated, with upside risks to inflation and downside risks to growth and employment.

A wide range of viewpoints is a cornerstone of our robust policy process. I look forward to continuing to work with FOMC colleagues to set monetary policy toward our goals of maximum employment and price stability.

This is all good stuff. Businessmen and their financial backers can see which issues are important to the decision-makers and be more confident in their own forecasts of likely monetary policy. We don’t get transparency like this in Canada, because BoC governors are too damn pompous to disagree with each other and would not dream of exposing themselves to criticism from the hoi polloi.

The Bank of Canada was first up this morning:

The Bank of Canada today held its target for the overnight rate at 2.25%, with the Bank Rate at 2.5% and the deposit rate at 2.20%.

The evolving conflict in the Middle East is causing heightened volatility and US trade policy continues to reshape global trade patterns. Both are ongoing sources of uncertainty. The Bank’s April outlook assumes tariffs remain unchanged and the global benchmark price of oil declines to US$75 per barrel by mid 2027.

The Iran war has led to sharply higher energy prices and transportation disruptions, diminishing growth prospects in oil-importing countries and boosting inflation worldwide. In the United States, growth is still expected to be solid over the projection horizon, boosted by AI-related investment and consumption growth. China’s economy is being supported by robust exports. In the euro area, higher prices for oil and natural gas will weigh on economic activity.

Financial conditions have been volatile, reflecting daily developments in the Middle East and shifting market expectations for inflation and interest rates. Bond yields are modestly higher since January while equity markets, which weakened sharply at the outset of the war, have recovered. Since the start of the war, the US dollar has appreciated against most major currencies. The Canada-US exchange rate has been relatively stable.

Overall, the global economy is expected to grow by about 3% in 2026, 2027 and 2028. Projections for inflation over the next year are revised up because of the jump in energy prices.

The outlook for economic growth in Canada is little changed from the January Monetary Policy Report (MPR) projection. After a contraction in the fourth quarter of 2025, growth is forecast to have resumed in early 2026. Consumer and government spending are supporting economic activity, while tariffs and trade uncertainty are weighing on exports and business investment. Housing activity declined in the fourth quarter and is being held back by slow population growth, economic uncertainty and ongoing affordability issues. The labour market is soft, with subdued employment growth over the past year and job losses in sectors targeted by US tariffs. The unemployment rate remains in the 6½%‑7% range, reflecting both weak hiring and fewer job seekers.

The Bank’s April forecast projects GDP growth of 1.2% in 2026, rising to 1.6% in 2027 and 1.7% in 2028 as growth in exports and business investment resumes along a lower trajectory. With GDP growing slightly above potential, the current excess supply in the economy is gradually absorbed. While the war in Iran may alter its composition, overall GDP growth is little changed in the updated forecast: Since Canada is a large net exporter of oil, higher oil prices increase national income even as consumers are squeezed by higher gasoline prices.

CPI inflation climbed to 2.4% in March because of sharply higher gasoline prices. The March increase follows several months of slowing inflation data. Core inflation has been easing and held steady at just above 2% in the most recent inflation report. The proportion of components of the CPI basket rising above 3% has also declined in recent months. As expected, so far there is little evidence that oil prices have fed through more broadly to goods and services prices, but this warrants close attention in the months ahead. Near-term inflation expectations have moved up with higher gasoline prices and still-elevated food price inflation, but longer-term inflation expectations have remained anchored.

CPI inflation will likely rise further in April to about 3%. Based on the assumption that oil prices will ease, inflation is forecast to come down to the 2% target early next year and remain around 2% over the projection horizon.

Against this backdrop and taking into account the current projection, Governing Council decided to maintain the policy rate at 2.25%. We are closely monitoring the impact of the conflict in the Middle East and how the economy is responding to US tariffs and trade policy uncertainty. Governing Council is looking through the war’s immediate impact on inflation but will not let higher energy prices become persistent inflation. As the outlook evolves, we stand ready to respond as needed. The Bank is committed to maintaining Canadians’ confidence in price stability through this period of global upheaval.

Of interest was the Monetary Policy Report and its conclusion regarding the neutral rate of interest:

The neutral rate is the rate at which the policy interest rate would settle in the long run once output is sustainably at its potential and inflation is at target, after the effects of all cyclical shocks have faded.

Given that Canada is a small open economy, its neutral rate is affected by the global neutral rate. The Bank of Canada uses the US neutral rate as a proxy for the global neutral rate. The US neutral rate is estimated to be within a range from 2.5% to 3.5%, somewhat higher than the 2.25% to 3.25% range presented in the April 2025 Report. The main reason for the upward revision is the boost to US productivity from AI investment and adoption. Gains are partially offset by a downward revision to population growth.

The Canadian nominal neutral rate is estimated to be within the range of 2.25% to 3.25%, unchanged from that in the April 2025 Report. Developments since the April 2025 Report are judged to be broadly offsetting.

• Upward pressures arise from two areas. First are spillovers associated with a higher US neutral rate. The second is a modest increase in growth in trend labour productivity due to upward revisions to the historical data of Canadian GDP and capital stock, as well as the assumed positive impact of AI adoption.
• Downward pressures stem from slower‑than‑expected population growth in the long term.

Risks to Canada’s neutral rate are judged to be broadly balanced. On the upside, US tariffs could reduce overall demand for Canadian assets in US capital markets, necessitating a higher neutral rate to attract alternative investors. On the downside, heightened trade uncertainty could increase precautionary savings among Canadian households and businesses, exerting downward pressure on the Canadian neutral rate.

In the afternoon it was the Fed’s turn to state its views:

Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained low, on average, and the unemployment rate has been little changed in recent months. Inflation is elevated, in part reflecting the recent increase in global energy prices.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Developments in the Middle East are contributing to a high level of uncertainty about the economic outlook. The Committee is attentive to the risks to both sides of its dual mandate.

In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 3‑1/2 to 3‑3/4 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lisa D. Cook; Philip N. Jefferson; Anna Paulson; and Christopher J. Waller. Voting against this action were Stephen I. Miran, who preferred to lower the target range for the federal funds rate by 1/4 percentage point at this meeting; and Beth M. Hammack, Neel Kashkari, and Lorie K. Logan, who supported maintaining the target range for the federal funds rate but did not support inclusion of an easing bias in the statement at this time.

Bryan Mena of CNN observed at 2:03pm:

The so-called easing bias is in this sentence in the policy statement: “In considering the extent and timing of additional adjustments to the target range for the federal funds rate,” specifically the word “additional.”

… and, three minutes later:

I did not even know Fed officials could cast dissents that specific.

At 2:04 he stated:

It is the first time since October 1992 that there have been four dissents of any kind.

Despite all this standing pat and hints of an inclination to be dovish, bonds got hammered today, but this was due to oil, not policy:

Oil was at the centre of much of the market’s attention, spiking to multi-week highs and prompting money markets to price in a higher likelihood of rate hikes in the months ahead in both Canada and the U.S.

Traders are now ⁠pricing in 59 basis points of Bank of Canada rate hikes this year, up from 39 ​basis points a day earlier, swap market data showed. Rising energy prices have revived fears of broader inflation, ⁠even as the Federal Reserve concluded what is probably its last policy meeting of the Jerome Powell era ⁠by leaving its key interest rate unchanged, as expected.

Crude prices jumped after the White House confirmed reports that U.S. President Donald Trump told officials ​to prepare for a prolonged blockade of Iranian ports, which suggests ongoing supply pressures ‌due to restricted traffic in the crucial Strait of Hormuz.

The Canada 5-Year yield was up about 12bp to 3.26%.

PerpetualDiscounts now yield 5.70%, equivalent to 7.41% interest at the standard conversion factor of 1.3x. Long corporates yielded 4.99% on 2026-4-29. Therefore the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed slightly (and perhaps spuriously) to 240bp from the 245bp reported April 22.

Soon we will all have a chance to invest in Canada’s version of State Capitalism!

Ottawa plans to grow its new sovereign wealth fund through a combination of buy-in from retail investors and efforts to reallocate money that is tied up in airports and other federal assets.

On Monday, the Prime Minister Mark Carney announced a new $25-billion sovereign wealth fund, which will focus on investing in companies and infrastructure projects that are part of the government’s major projects agenda.

The spring economic update on Tuesday offered few additional details about how the fund will work in practice.

But it did say the government will look to grow the pool of capital beyond the initial $25-billion in seed funding by allowing Canadians to invest in the fund, and by what the government says is optimizing existing federal assets.

I’m busy warming up my cheque-book to get in on the ground floor of this opportunity … we can bring back the Avro Arrow! We can monetize our expertise in building large pay-roll systems! Most excitingly, we can build secure apps for mobile ‘phones! Apps are cool, right? We’ll sell millions of them!

The TXPR price index set a new 52-week high today of 702.72, eclipsing the old mark of 702.39 set Friday. That was in the morning … it eased to 700.67 at the close.