GF SECURITIES: The Federal Reserve maintains interest rates unchanged, with rate cut expectations postponed to July

According to the Zhitong Finance APP, GF Securities released a research report stating that the Federal Reserve decided to maintain the federal funds rate target range at 4.25%-4.5% during the May 2025 monetary policy meeting, marking the third pause since the interest rate cut cycle began in September 2024, which aligns with market expectations. Although the GDP contracted on a quarter-over-quarter annualized basis in the first quarter, the Federal Reserve believes the economy is resilient, private demand is robust, and the job market remains strong; short-term inflation has rebounded due to tariff disruptions, but long-term expectations remain stable. The Federal Reserve emphasized a "passive response" in its policy stance, indicating that rate cuts will wait for clear signals from "hard data," with market expectations for a rate cut in June cooling to 19.8% and rising to 59.1% for July.

GF Securities' main viewpoints are as follows:

First, during the Federal Reserve's May 2025 monetary policy meeting, FOMC officials unanimously voted to maintain the federal funds rate target range at 4.25-4.5%, marking the third pause since the rate cut cycle began in September 2024. At the same time, the Federal Reserve stated it would continue to reduce its balance sheet. The decision not to cut rates at this meeting was within market expectations, but what is relatively more important is the Federal Reserve's understanding of economic and inflation issues.

Second, in the press conference, Powell's main points in his opening speech were that the economy is in a solid position, inflation continues to decline, and monetary policy is currently in a good place. (1) The contraction of the GDP on a quarter-over-quarter annualized basis in the first quarter was mainly due to companies rushing to import, but private final domestic demand remains robust. (2) Employment conditions also remain solid, with an average of 155,000 new non-farm jobs added over the past three months, a low unemployment rate, and orderly slowing of the growth rate. (3) Inflation has significantly declined compared to mid-2022, short-term inflation expectations have rebounded somewhat, with tariffs being the main backdrop; long-term inflation expectations remain stable.

Third, Powell also provided a scenario analysis of potential risks. If the price level rebound caused by tariffs is a one-time shift, to avoid a one-time price rebound turning into sustained high inflation, the Federal Reserve will seek a balance between achieving maximum employment and price stability. If inflation proves to be sustainable and the job market is weak, the Federal Reserve will assess how far the economy is from its various targets and how long it is expected to take to close those gaps.

Fourth, the bank understands that Powell does not believe the current state of the U.S. economy indicates an immediate need for rate cuts, and there is insufficient evidence regarding whether the transmission path of tariffs primarily affects growth or inflation. Changes in "hard data" may serve as a final standard: although recent economic soft data remains weak, hard data is still relatively normal, and this cycle has repeatedly demonstrated that weakening soft data does not necessarily mean recession; Powell also mentioned in the press conference that there is not a strong correlation between soft data and hard data. The Federal Reserve's April report also noted that what consumers say (survey data) and what they actually do (hard data) are inconsistent.

On this basis, Powell expressed a neutral stance, maintaining a "wait and see" attitude towards rate cuts: (1) When asked what might lead to a change in policy at the June meeting, despite the Federal Reserve not being in a hurry to cut rates, Powell stated that the Federal Reserve can remain patient and flexible, but cannot provide a clear timeline for rate cuts at this stage (2) When asked how Powell views the soft landing of the U.S. economy and the market's continued downgrade of U.S. economic expectations, Powell believes that tariffs may lead to higher inflation and lower growth, but the Federal Reserve cannot make a definitive judgment before the data is released.

Fifth, the FOMC statement changed little. First, it added "affected by net export data" at the beginning of the statement, but still described economic activity as solid pace. Second, it included the new statement that "the committee believes the risks of rising unemployment and rising inflation have intensified," which elaborates on the potential impact of tariffs on the economy, but does not convey the Federal Reserve's hawkish/dovish stance. Third, in the outlook paragraph, it added that uncertainty has "further" increased.

Sixth, it is worth noting that during the International Monetary and Financial Committee (IMFC) meeting on April 25, Powell emphasized in his speech that central banks must stay away from political interference to ensure they can focus on maintaining stable inflation and employment rates. This reflects Powell's cautious stance, which differs from the focus of the Trump administration. In this monetary policy meeting, Powell used the term "wait" more than 20 times. The understanding of his insistence on "waiting" also reflects the FOMC committee's consensus tendency, which is that the Federal Reserve's current policy framework is reactive rather than preemptive, and there will be no major changes before hard data (especially employment data) weakens. The expectation for the timing of the next Fed rate cut has been pushed back from June to July.

Seventh, after the monetary policy meeting, the market further lowered expectations for a rate cut in June. CME Fed Watch shows that the market expects the probability of a Fed rate cut in June and July to be 19.8% and 59.1%, respectively, down from 30.5% and 56.6%. On the same day, the S&P 500 index, Nasdaq index, and Dow Jones index rose by 0.4%, 0.3%, and 0.7%, respectively. The yield on the 10-year U.S. Treasury bond fell slightly by 3 basis points to 4.26%, and the U.S. dollar index rose to 99.61