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According to Jens Nærvig Pedersen, senior analyst at Danske Bank, the US Fed caught the market by surprise yesterday by cutting the Interest on Excess Reserves (IOER) by 5bp to 2.35% from 2.45% but Powell stressed during the press conference that this should not be interpreted as the beginning of an easing cycle.

Key Quotes

“The Effective Fed Funds rate (EFFR) has risen to 2.45% since Easter due to a decline in the supply of bank reserves and was thus only 5bp below the top end of the Fed’s target range. The quickest way for the Fed to return the EFFR closer to the mid-point is to cut the IOER.”

“There had been speculation in the market that the Fed could make this move at the June meeting, but the market was not priced for a cut to come at the May meeting – the May Fed Funds futures have traded around 2.42%.”