Shangbo Investment Management: The U.S. maintaining interest rates unchanged aligns with market expectations, emphasizing the dilemma of high unemployment and inflation

According to the Zhitong Finance APP, Ali Hassan, portfolio manager at Shangbo Investment Management, stated that the market expects the Federal Reserve to take no action, and the authorities did not disappoint. This decision and statement brought no new developments, as the Federal Open Market Committee (FOMC) maintained the federal funds rate in the range of 4.25% - 4.50%. The statement was bland and diplomatically worded, acknowledging uncertainty. The only noteworthy point was that the authorities emphasized the dilemma between potential high unemployment and high inflation, rather than just focusing on inflation. There was no update on the economic forecast summary scheduled for this meeting, making the press conference crucial.

Amid fluctuations in tariff policy, the Federal Reserve's response mechanism has been controversial, including the timing and depth of its reactions. Many observers, including Federal Reserve Governor Christopher Waller, believe that tariffs have a one-time impact on inflation and advocate for an immediate rate cut. However, the Federal Reserve's mistake of viewing inflation as transitory and keeping rates too low for an extended period after the pandemic has cast a shadow over current considerations for preventive rate cuts.

U.S. President Trump's tariff announcements and the reactions of trade partners have shocked the market. Companies have been preparing contingency plans and withdrawing guidance during this earnings season, waiting for further solutions. The market is seeking a stable foothold amid ambiguous tariff negotiations. Meanwhile, the economy has begun to slow down. The first quarter GDP released at the end of April showed a contraction in the U.S. economy. Survey data and high-frequency data (such as container shipping) also point in the same direction. Tariffs not only suppress growth but may also trigger inflation, creating a complex environment for the Federal Reserve, which Chairman Powell briefly acknowledged in last month's statement.

Powell emphasized that maintaining stable inflation expectations is the foundation for long-term inflation and growth. Therefore, there is a general consensus that the Federal Reserve is unlikely to take rate-cutting actions without more evidence. There is still debate over how much pain the economy must endure before the authorities can abandon inflation risks and shift towards supporting economic growth. The Federal Reserve claims to rely on data, but in such a rapidly changing situation, it needs to understand which soft data and leading indicators the authorities prioritize when adjusting policies and act swiftly in June. When the authorities begin to take action, the cuts may need to be larger to keep pace with the slowdown in growth and stimulate consumption. After all, if higher rates do not deter consumers and lock in favorable financing for companies, then a larger rate cut may be needed from the opposite direction to stimulate debt-based demand.

Ali Hassan stated the final point: Given Trump's direct personal criticism and the scapegoating of the Federal Reserve, Powell has been wavering between maintaining the independence of the Federal Reserve and avoiding further political controversy. The institution expects Powell to face tests and challenges.