The Federal Reserve's "key battle" is in May; if interest rates cannot be cut then, this year will be in jeopardy?

Was yesterday's FOMC meeting just a "rehearsal," with the next meeting being the "main event"?

After the Federal Reserve announced its latest interest rate decision on Wednesday, Jim Bianco, a veteran Wall Street professional with 40 years of experience and president of Bianco Research, appeared on Bloomberg Television to share his views on the potential future interest rate path of the Federal Reserve.

Bianco emphasized that, at this point, the most important meeting for the Federal Reserve will be the next meeting scheduled for May 7—if the Federal Reserve still cannot find a reason to cut interest rates by May 7, then they will not cut rates again this year (unless some unforeseen circumstances arise).

Bianco explained that the current slowdown in actual economic growth in the U.S. has outpaced the rise in inflation, and the market is already anticipating that the Federal Reserve will take action to address the economic slowdown.

This means that if the Federal Reserve does not take action at the May meeting, they will need to provide more reasons to support this decision. In Bianco's view, the recently held FOMC meeting was merely a "rehearsal" for the May meeting.

Inflation Remains the Biggest "Hurdle" for the Federal Reserve to Delay Rate Cuts

When asked, "How will the Federal Reserve respond if inflation reignites alongside low growth?" Bianco referenced the case from last September when the Federal Reserve initiated its rate-cutting cycle with a 50 basis point cut.

Bianco stated, at that time, the Federal Reserve's significant 50 basis point cut was seen as "not taking the inflation issue seriously," leading to a sharp decline in the bond market.

Similarly, if the Federal Reserve insists on cutting rates in the face of economic slowdown but persistent inflation, it may be interpreted as neglecting inflation, and they could face the same market reaction again.

"If you want the 10-year Treasury yield to reach 5%, then cut rates while the market is still worried about inflation."

Bianco warned that the core inflation rate in the U.S. has been above 3% for 46 consecutive months, far exceeding the Federal Reserve's 2% target, indicating that inflation risks remain very prominent:

"If they cut rates again, the likelihood of adverse reactions is very high."

CITIC Securities previously analyzed that if it is merely the natural downward pressure on the economy, a rapid rate cut by the Federal Reserve could resolve the issue, which is not a concern; however, if they also face supply-side inflation challenges, then the Federal Reserve will have to confront a declining growth without being able to act, and may even face pressure to raise rates, similar to 2022, which is what the market is worried about.

CITIC Expects Inflation to Decline Until May, Potentially Opening a Window for Rate Cuts

CITIC believes that the timing and path of future rate cuts will depend on two major factors: the natural economic path and the speed and intensity of tariff policies.

Considering that there are still many uncertainties regarding tariffs, in terms of the former, CITIC estimates that inflation will continue to decline until May (with an overall CPI low of 2.6%), and the reflexivity of the rate decline that began in mid-January has yet to manifest, thus providing a window for rate cuts during this period.