On May 6th local time, the Federal Reserve held a two-day monetary policy meeting in Washington. The meeting took place amid multiple challenges facing the U.S. economy: on one hand, GDP experienced its first quarterly contraction since 2022, and on the other, the inflation pressure from tariff policies remains unclear, causing policymakers to cautiously weigh the options between staying put and signaling easing measures.
Pausing Easing, Watching Economic Trends
After cumulatively cutting interest rates by 100 basis points in 2023, the Federal Reserve has paused further easing this year. Although President Trump has expressed dissatisfaction with this position, even causing market tremors with rumors of "removing Powell," the market generally anticipates no substantive policy adjustments at the May meeting.
According to the U.S. Department of Commerce, the GDP contracted at an annual rate of 0.3% in the first quarter, mainly due to a trade deficit dragging down overall economic performance. In March, the trade deficit widened to a record $140.5 billion, reducing GDP by over 4 percentage points.
However, employment data offered some support: in April, 177,000 non-farm jobs were added, exceeding market expectations, with the unemployment rate stable at 4.2%. Initial jobless claims remain in a healthy range, alleviating market concerns over a hard economic landing.
Senior economist Sal Guatieri at BMO noted that stable employment provides a window for the Federal Reserve to observe further and evaluate the actual impact of tariff policies on inflation and growth.
Powell's Cautious Stance Continues, No Clear Forward Guidance Likely
Federal Reserve Chairman Powell stated in a speech in Chicago that despite downside risks, the U.S. economic fundamentals remain solid. There is a need to further confirm whether the inflation caused by tariffs is persistent.
The market generally expects Powell to maintain the previous tone at this meeting, refraining from making aggressive statements or providing new forward guidance. BK Asset Management strategist Schlossberg believes Powell is likely to focus on changes in business and consumer sentiment while keeping an open stance on policy flexibility.
Nevertheless, pressure from data is mounting. ADP data showed that private sector employment in April increased by just 62,000, the lowest in nearly ten months. ADP Chief Economist Richardson pointed out that businesses are uneasy about the economic outlook and are cautious in hiring.
Tariffs and Inflation are Policy Hurdles, Rate Cut Expectations Delayed to July
Multiple officials have stated that the Federal Reserve will not rush to take action in May or June. Dovish representative Governor Waller expressed that only after July might changes in economic data provide a basis for policy adjustments.
Forecasts from institutions commonly suggest the Federal Reserve might wait for signs of peaking inflation before lowering rates. RSM Chief Economist Brusuelas stated that unless there is structural weakness in the labor market, rate cuts will not commence rashly.
Currently, federal funds futures indicate that the market expects the rate cut window to be postponed from June to July, with the number of rate cuts for the year reduced from four to three. The New York Fed model shows a 30% probability of a U.S. recession in the next 12 months, with forecasts from Goldman Sachs and JPMorgan exceeding 40%.
Danske Bank noted in its report that although the trade war pressures the economy, the impact on hard data remains relatively mild. The bank believes that as long as the labor market remains stable, the Federal Reserve will have the technical conditions for a rate cut in June.
In contrast, Brusuelas believes that the Federal Reserve may not truly begin a rate-cutting cycle until midyear, with two rate cuts for the year being a "reasonable expectation."
