The Federal Reserve (FED) has once again paused interest rate cuts, warning of stagflation risks and reiterating that "uncertainty" is increasing.

Author: Wall Street Insights

Key points:

The Federal Reserve has paused interest rate cuts for three consecutive meetings, in line with market expectations.

The statement claims that economic uncertainty has "further" increased, with the new statement noting that "the risks of rising unemployment and inflation have increased."

The statement reaffirms that recent indicators show economic activity is still expanding steadily, but points out that fluctuations in net exports have affected the data.

Continue to taper.

This resolution received the support of all FOMC voting members, unlike last time when there was one dissenting vote.

"New Federal Reserve News Agency": Federal Reserve officials are considering whether the focus is on employment risks or inflation risks.

President Trump of the United States is disappointed again. Despite repeatedly calling for interest rate cuts, the Federal Reserve chose to remain cautious and did not lower rates, also hinting that Trump's policies carry the risk of stagflation.

On May 7, Wednesday, Eastern Time, the Federal Reserve announced after the Federal Open Market Committee (FOMC) meeting that the target range for the federal funds rate would remain unchanged at 4.25% to 4.5%. This marks the third consecutive meeting of the Federal Reserve where a decision has been made to pause actions on monetary policy. The Fed has cut interest rates three times since last September, totaling a reduction of 100 basis points, and has been on pause since January this year, when Trump took office.

The Fed's pause in interest rate cuts this time was completely expected by the market. By Tuesday's close, CME tools showed that futures markets were pricing in a more than 95% chance that the Fed would keep rates unchanged this week, a more than 68% chance that it wouldn't cut rates in June, and about a 77% chance of a rate cut in July. Ahead of the Federal Reserve's decision on Wednesday, derivatives market pricing showed traders trimming their bets on rate cuts, with about three 25 basis point rate cuts expected this year starting in July.

The non-farm payroll data released last Friday for April in the U.S. exceeded expectations, reflecting that the labor market still has resilience, which cooled investors' expectations for interest rate cuts. Nick Timiraos, known as the "new Federal Reserve correspondent," commented that the non-farm data reduced the likelihood of a rate cut in June; facing the dilemma of economic recession and inflationary pressures, the Federal Reserve is more likely to lean towards avoiding uncontrolled inflation, and thus may postpone rate cuts.

After the Federal Reserve's decision is announced this Wednesday, Timiraos commented that the Fed warned of an increased risk of rising unemployment and inflation, and that Fed officials are considering whether to focus on the risks of rising prices or the risks of weak employment. In other words, the Fed has to consider whether the priority is to maintain employment or to combat inflation.

Economic uncertainty has "further" increased, and the risks of rising unemployment and inflation have increased.

Compared to the last FOMC statement at the end of March, this time the Federal Reserve's decision statement has three main changes. First is in the assessment of the economy.

The last statement removed the phrase "the risks of achieving employment and inflation targets are generally balanced" and added the sentence "uncertainties related to the economic outlook have increased." This time, the statement adjusted this sentence again, changing it to "uncertainties related to the economic outlook have further increased," adding the word "further" to emphasize the reality of the increasing "uncertainty."

Following the adjustment of the above statement, this declaration reiterates that the FOMC Committee focuses on the two-sided risks it faces in achieving the dual mandate of maximum employment and price stability, and then adds a half-sentence:

"It is determined that the risks of rising unemployment and rising inflation have increased."

In addition, this statement has slightly modified the assessment of the economy in the first paragraph. The first sentence of the last statement was that recent indicators show economic activity continues to expand steadily. This statement added half a sentence before this statement, resulting in the beginning of the statement reading, "Although fluctuations in net exports have affected the data," recent indicators show that economic activity continues to expand steadily.

Continue to taper, all FOMC voting members support the resolution.

The last resolution showed that the Federal Reserve decided to further slow down the pace of reducing its balance sheet (tightening) following last June.

The specific approach is to lower the monthly redemption limit for U.S. Treasury bonds from $25 billion to $5 billion starting in April, while keeping the monthly redemption limit for agency debt and agency mortgage-backed securities (MBS) unchanged at $35 billion.

This statement does not mention again the adjustment of the redemption cap of U.S. Treasury bonds, which was made starting in April, directly deleting the sentence regarding the adjustment. It reiterates that the Federal Reserve will continue to reduce its holdings of U.S. Treasury bonds, agency debt, and agency MBS.

This means that after the Federal Reserve began to slow down its balance sheet reduction in April, there was no further change to its balance sheet reduction guidance.

Compared to the statement from the last meeting, another major difference this time is that all voting members of the FOMC supported this decision: neither adjusting interest rates nor changing the balance sheet reduction.

In the last meeting, one FOMC member opposed the resolution. The Federal Reserve Governor Christopher Waller, who voted against it, supports continuing to pause interest rate cuts but does not advocate slowing down the balance sheet reduction, hoping to maintain the current pace of the reduction.

The following red text shows the deletions and additions in this resolution statement compared to the last one.