As expected, the US Federal Reserve’s policy committee held benchmark borrowing costs at a 23-year high for a sixth consecutive meeting, and signalled a desire to wait for more data before beginning an easing cycle. In the statement setting out its decision, the Federal Open Market Committee outlined its deepening concern over the pace of disinflation in the US economy, saying “In recent months, there has been a lack of further progress toward the committee’s 2-percent inflation objective”, removing a previous reference to inflation that had “eased” over the past year.

Risks to accomplishing both sides of the central bank’s mandate were seen “moving into better balance,” and the statement repeated forward guidance language from March, saying it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent”.

Data releases in the last week have added fuel to upward moves in Treasury and currency markets, with upside surprises in several measures of core inflation helping to send rate cut expectations spiralling lower.

Following through on a series of hints provided in recent months, the central bank opted to slow its balance sheet rolloff, reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion. This is slightly more than we had expected, and might serve a a signalling device for investors, providing (deeply misconstrued) evidence of an easing bias among policymakers.

Treasury yields are pressing lower, and the dollar is trading sideways, suggesting that market participants are keeping their powder dry. Chair Jerome Powell’s words during the post-decision press conference will be tightly scrutinised for evidence of a more hawkish bias, with investors ready to bail out of risk-sensitive trades if he follows in New York Fed President John Williams’ footsteps from mid-April, when he acknowledged rates could go higher yet.

If a more aggressive posture fails to materialise however, we suspect risks are tilted toward the dovish end of the spectrum. Long positions on the dollar look overwrought at the moment, and we think rate cut expectations are nearing fundamental levels.