ING: The Federal Reserve's wait-and-see stance may continue until September, when a rate cut of up to 50 basis points is expected

According to the Zhitong Finance APP, ING (International Netherlands Group) released a research report stating that the Federal Reserve has once again held steady and acknowledged that uncertainty has increased, with rising risks of inflation and unemployment. This indicates that the Federal Reserve is unlikely to take action until it has sufficient confidence in the data trends, which means that interest rate cuts may be delayed, but once the Federal Reserve begins to cut rates, the magnitude may be greater.

Federal Reserve Maintains Interest Rates, Emphasizes Increased Uncertainty

ING pointed out that at this week's policy meeting, the Federal Open Market Committee (FOMC) unanimously agreed to keep the federal funds rate unchanged at 4.25%-4.50%. The statement noted that the U.S. economy continues to "expand at a robust pace," the labor market remains "strong," and inflation "is still rising." These phrases are consistent with those from the last policy meeting.

The key change is that the Federal Reserve believes "the uncertainty surrounding the economic outlook has further increased," and that "the risks of rising unemployment and inflation have increased." These comments are not particularly surprising, and the market's reaction has been limited.

"Wait-and-See" Stance May Persist for Several Policy Meetings

Despite repeated pressure from U.S. President Trump and Treasury Secretary Mnuchin for the Federal Reserve to cut rates, these demands may continue to be ignored, as Federal Reserve officials are working to assess the impact of government trade policies on inflation while the labor market remains strong.

Higher tariffs are expected to push up prices, and port operators and logistics companies are warning of potential supply tightening risks, which could exacerbate short-term inflation threats. Therefore, the Federal Reserve is in a "wait-and-see" mode. Federal Reserve Chairman Powell warned last month: "Our responsibility is to keep long-term inflation expectations stable and ensure that one-time price increases do not evolve into a persistent inflation problem." This point was reiterated at the press conference following the interest rate decision announcement.

Federal Reserve May Delay Rate Cuts, But Cuts Could Be Larger

ING stated that the collapse of consumer and business confidence to levels consistent with historic recessions will worry the Federal Reserve. Economic uncertainty and government spending constraints mean that a trade agreement and tax cuts must be reached as soon as possible to prevent stagflation-like declines. Nevertheless, ING expects that housing-related deflation (as indicated by the Cleveland Fed's new tenant rent series) will provide the Federal Reserve with room to cut rates later this year. The market tends to believe that the Federal Reserve will start cutting rates in July, but ING sees the risk of a delay, suggesting that the Federal Reserve may resume rate cuts in September by 50 basis points, similar to 2024.

There are no substantial comments on the balance sheet reduction process, and the bond market fluctuates around rate cut expectations.

ING noted that the immediate market reaction following the preliminary news release was a drop in rates and a steepening of the yield curve, with most of the action concentrated in the real interest rate area. This suggests that the Federal Reserve is prepared to address rising unemployment and "tolerate" the risks of rising prices. This reaction is based on some brief, relatively balanced segments in the monetary policy statement. The market's price reaction requires further confirmation from the press conference. In fact, the comments at the press conference did not completely align with the earlier market trends, leading to a rebound in market rates. Overall, market rates have slightly declined, and ING believes there is an opportunity for continued downward movement based on the accumulation of macro pressures In this case, the 10-year Treasury yield could easily dip to the 4% range. However, for now, the current economic conditions remain solid enough to keep market interest rates at their current levels.

There is no new information regarding balance sheet reduction (quantitative tightening). At the last meeting, the Federal Reserve lowered the balance sheet reduction cap to $5 billion per month, which is effectively zero. This means the Federal Reserve continues to be a net buyer of Treasuries, whereas the previous balance sheet reduction range was $20 billion to $60 billion per month. Current policies remain unchanged. Meanwhile, the balance sheet reduction cap for mortgage-backed securities (MBS) remains at $35 billion per month, but this cap has not been reached, meaning that maturing MBS bonds will not be reinvested. Amounts exceeding $35 billion will be reinvested in Treasuries (which is quite rare).

In the long term, the Federal Reserve aims to completely remove MBS bonds from its balance sheet, ideally replacing them with Treasuries. However, there are no new comments on this today. Clearly, this topic will be discussed later, perhaps when market impacts are smaller. Currently, the slow balance sheet reduction process continues and can be advanced further, as bank reserves remain ample. A technical factor is the debt ceiling issue; before the debt ceiling is raised or suspended, the U.S. Treasury is depleting funds, which effectively increases bank reserves.

The foreign exchange market is not yet focused on the Federal Reserve

After the statement from the Federal Open Market Committee, the dollar weakened slightly, but the overall reaction in the forex market was quite limited. Recently, short-term spreads have had little impact on dollar cross rates, and the dollar is more under pressure due to the Federal Reserve's concerns about rising unemployment and inflation, rather than today's hawkish or dovish leanings. After all, prior to this policy meeting, the dollar OIS curve experienced a hawkish repricing of nearly 20 basis points, but the dollar's rebound has been weak.

The dollar still embeds a considerable risk premium relative to the usual market drivers (interest rates and stock market spreads, global risk sentiment). ING estimates that the euro to dollar exchange rate is overvalued by about 4%. However, getting the market to accept a significantly reduced risk premium will not be straightforward. Continuous positive news on trade risk alleviation is a necessary condition, but in the context where the market believes tariffs have caused substantial damage to the U.S. economy, this may still be insufficient.

ING believes that the euro to dollar exchange rate will find sustained support in the 1.1250-1.1300 range in the short term: this area has proven to be an active range for most dip buying; the overall risk balance still leans towards upward movement for this currency pair