Minsheng Securities: How much longer will the Federal Reserve have to wait to cut interest rates?

According to Zhitong Finance APP, Minsheng Securities released a research report stating that "when it rains, it pours," as the "mess" of tariffs remains unresolved, and the escalating situation in the Middle East has caused oil prices to soar, once again leaving the Federal Reserve "worried." In the June meeting, the Federal Reserve unsurprisingly maintained its usual stance of "inaction," and it seems to want to extend the period of "inaction" even longer (more people support not lowering interest rates within the year). In the face of consecutive supply shocks, the Federal Reserve needs more time to assess inflation risks, and considering the current uncertainties in trade, fiscal policies, etc., "waiting" remains the best choice that the Federal Reserve has no choice but to make. The biggest highlight of the U.S. economy in the second half of the year is that "hard" data needs to "catch up," and in the next quarter, the risk of "stagflation" will once again become dominant, which will be an important trigger for changing the course of the September interest rate meeting.

Regarding the June interest rate meeting, maintaining the policy interest rate unchanged has basically become a consensus in the market. What is more noteworthy is Powell's views on recent employment and inflation data, as well as the inflation risks driven by subsequent tariffs:

In the meeting statement, compared to May, the main change is that the Federal Reserve's judgment on future uncertainties and risks has weakened, but it remains pessimistic. This is mainly due to the acceleration of trade negotiations and the phased easing between China and the U.S. Among them, the Federal Reserve's expression of uncertainty about the economic outlook has been revised from "further increasing" to "has weakened but remains high"; and the statement regarding "the risks of rising unemployment and inflation have increased" has been removed.

At the press conference, Powell continued to emphasize the inflation risks brought by tariffs and the insufficient data support for interest rate cuts. On one hand, given the current uncertainties in trade, fiscal policies, etc., although current tariff expectations have declined, their impact on inflation may be more persistent, and it is necessary to prevent a one-time increase in price levels from becoming a sustained inflation problem; on the other hand, the most important thing now is to remain patient and wait for the progress of subsequent economic data before making decisions, maintaining a neutral and wait-and-see attitude towards interest rate cuts overall.

In addition, compared to March, the June dot plot is clearly more "hawkish," but there are also greater divergences. Although the overall guidance for two interest rate cuts in 2025 remains unchanged, the number of officials expecting no interest rate cuts for the year has increased by three to seven (just slightly lower than the eight officials expecting two cuts), which also indirectly reflects a significant divergence within the Federal Reserve regarding which risk—inflation or employment—is greater.

In terms of economic forecasts, the baseline scenario of "stagflation" has been further reinforced. Compared to the March economic forecast (SEP), due to the unexpected impact of tariff policies on the economy and prices since April, the Federal Reserve has further lowered the economic growth rate for 2025 by 0.3 percentage points to 1.4%, while raising the PCE and core PCE growth rates by 0.3 percentage points each to 3% and 3.1% respectively; In terms of employment, although demand continues to cool, the supply contraction brought about by policies such as immigration may offset some of the negative impacts on the demand side, with the unemployment rate forecast to rise only slightly by 0.1 percentage points to 4.5%.

How much longer does the Federal Reserve need to wait? It is foreseeable that, without the disruption from tariffs, based on recent inflation and labor data, there would be ample reason for the Federal Reserve to cut interest rates immediately at this moment. However, the Federal Reserve is currently more concerned about inflation expectations. Although inflation growth has slowed in recent months, any rise in inflation risks would make the Federal Reserve feel "uneasy." The lagging inflation effects of current tariffs and the surge in oil prices due to the geopolitical situation in the Middle East have caused inflation expectations to fluctuate, putting the Federal Reserve in a "dilemma."

The Federal Reserve "does not want to make mistakes," so it needs more time to observe the impact of tariffs on the data, until tariffs lead to sustained inflation increases or a rapid deterioration in the labor market, rather than just singular data disturbances. This also means that the Federal Reserve will need to wait at least 2-3 more months, and a clearer picture of inflation and economic activity may only fully emerge after the release of the August CPI and non-farm payroll data. Therefore, it is difficult to see substantial interest rate changes before September.

The next quarter is the most important time window, and there are increasing signs that the impact of tariffs is beginning to gradually manifest, with the speed and magnitude of changes in prices and economic activity expected to accelerate. Minsheng Securities predicts that hard data related to the economy and employment will "catch up" in the third quarter, becoming an important driver for a shift in September:

"Hard" data is converging with "soft" data at an accelerated pace. Since the tariffs in April, consumer confidence and business surveys (soft data) have weakened rapidly, while official statistical data has shown strong resilience. However, recent signs indicate a reversal of this situation: retail sales fell by 0.9% month-on-month in May, marking the largest decline in two years; industrial output decreased by 0.2% month-on-month, below market expectations.

With the reversal of previous "import rush," inventory depletion, and the overextension of production and consumption, a downturn in the U.S. economy has become inevitable. The divergence between "soft" and "hard" data may also be corrected later. In particular, the resilient consumption and non-residential investment in the first half of the year may see a significant slowdown in growth in the second half, dragging down the overall growth center

In addition, the hidden dangers and cracks in the labor market are gradually emerging. On one hand, the May non-farm report revised down the total new employment data for March and April by 95,000, reflecting that the labor market is not as optimistic as imagined, and the hidden dangers of a downturn in the job market are intensifying;

On the other hand, according to high-frequency data, as of the latest date, the number of initial unemployment claims in the United States and the number of continuing claims have unexpectedly risen to 248,000 and 1.956 million, respectively, reaching the highest levels since October 2024 and December 2021. The overall difficulty of employment in the labor market is increasing, which is increasingly consistent with the downward risks indicated by the consumer confidence index and the PMI employment sub-index. If employment data unexpectedly slows in the third quarter, it will accelerate the Federal Reserve's decision to cut interest rates.