Walking a tightrope under various pressures! The Federal Reserve may "hold steady" at this meeting

At the May interest rate meeting, the Federal Reserve may not take any action.

According to the Zhitong Finance APP, due to the unresolved uncertainties brought about by President Trump's tariffs, coupled with the simultaneous strong and weak signals from the U.S. economy, the Federal Reserve can only wait and see for now. Vincent Reinhart, a former senior official at the Federal Reserve and now the chief economist at BNY Investments, stated, "This meeting will be somewhat awkward, as the Federal Reserve does not have a clear forecast to indicate the direction of future meetings."

Reinhart pointed out that the Federal Reserve needs to meet two prerequisites before taking action: first, to confirm that policies (such as tariffs) are indeed implemented; second, to observe how these policies affect inflation expectations. "For this reason, the Federal Reserve must first delay and then proceed cautiously."

From the market's reaction, traders hardly believe that there will be any interest rate cuts at this week's meeting. According to the CME Group's FedWatch tool, there is currently only about a one-third chance that the meeting on June 17-18 will result in a rate cut.

In the past week, due to mixed economic data and the apparent softening of the Trump administration's stance on tariffs, market expectations have also changed. The White House has signaled that several trade agreements are about to be completed, although no substantial agreements have been reached yet.

Reinhart stated that BNY's expectation is for two rate cuts this year, slightly lower than the market's previous expectation of three. Just a week ago, the market was even betting on as many as four rate cuts starting in June.

Powell Needs to Signal Policy Direction

Federal Reserve Chairman Jerome Powell will bear the responsibility of explaining the policy direction at the post-meeting press conference.

"The more challenging part is that the Federal Reserve is also uncertain about what to do in June," Reinhart pointed out, "so Powell must indicate that 'everything is under consideration.' Although he says this every time, this time he must truly think so."

Powell will also inevitably be asked about the recent performance of economic data. Although consumer and business confidence is generally pessimistic, these sentiments have not yet fully reflected in hard economic indicators such as spending and employment. The annualized GDP growth rate for the first quarter in the U.S. was -0.3%, but this was mainly due to businesses importing heavily before the tariffs took effect on April 2.

Employment remains robust. Non-farm payrolls increased by 177,000 in April, exceeding market expectations. However, surveys in the manufacturing and service sectors show that businesses are deeply concerned about the impact of inflation and tariffs on supply chains, consumer confidence has dropped to a multi-year low, and inflation expectations have risen to decades-high levels.

All of this means that from now until June, the Federal Reserve needs to walk a tightrope amid various pressures.

No "Dot Plot" at This Meeting

"At this meeting, the Federal Reserve will emphasize 'patience' in its statement and press conference, continuing to wait for more data," said Tony Rodriguez, head of fixed income strategy at Nuveen. "It is not appropriate to take action now, but once signs of weakness in the labor market appear, we must be prepared to act." Nuveen expects two rate cuts this year and another two next year to address economic slowdown and price increases caused by tariffs. "We anticipate that there will be no actions taken at this meeting. They need more hard data, and it may not be clear until June or July at the earliest. The September meeting could be the time for the first rate cut."

At this meeting, the Federal Reserve will not update its economic forecasts or release the "dot plot" reflecting members' interest rate expectations; these will be published at the June meeting. Therefore, after this FOMC meeting, any adjustments in policy stance will mainly be reflected in the statement wording and Powell's press conference.

Goldman Sachs economist David Mericle stated in a report: "We believe it will take a few more months of data to provide sufficient evidence to support a rate cut." Goldman Sachs expects the Federal Reserve to cut rates once in July, September, and October to prevent further economic slowdown, even if this may temporarily raise inflation.

Trump Pressures the Federal Reserve Again

A potential "black swan" factor is President Trump. Just as he did during his first term, he has recently called for the Federal Reserve to cut rates to address inflation nearing the central bank's 2% target. However, Reinhart believes that the Federal Reserve will not yield to presidential pressure and that public statements from some members will not lead to internal divisions.

"To some extent, the pressure from the White House actually helps Powell maintain the committee's unity," Reinhart said, "because when the 'family' is under external attack, internal members tend to criticize each other less. Would you publicly criticize Powell and side with the president in such a situation? If you are a career official within the Federal Reserve system, the answer is likely no."