#June FOMC Meeting Decision: Holding Steady Almost Certain

Keeping interest rates unchanged: The market widely expects the Federal Reserve to keep the federal funds rate between 3.50% and 3.75% at the June 16-17 meeting.

New Chair's First Appearance: This will be the first policy meeting hosted by new Federal Reserve Chair Kevin Warsh since taking office.

Communication Framework Reform: Warsh plans to initiate communication mechanism reforms at this and subsequent meetings, including possibly removing the "dot plot" (refusing to submit individual rate forecasts) and deleting the "dovish bias" language in policy statements that hints at future policy directions.

II. Macroeconomic Data and Policy Logic: High Inflation and Strong Employment

Persistent Inflation: In April, core PCE price index rose 3.8% year-over-year, the largest increase since 2023. Multiple factors such as Middle East conflicts pushing energy prices higher, tariff pass-through, and AI investment booms have kept inflation above the 2% target.

Resilient Employment: In May, non-farm payrolls increased by 172k, far exceeding the market expectation of 85k, with revisions upward for the previous two months. The unemployment rate remains low at 4.3%, indicating no significant tightness or softening in the labor market.

Macro Impact of AI: Fed officials (such as Daly) have stated that AI has neither pushed inflation up nor down, with limited short-term impact on monetary policy; its productivity-enhancing effects are yet to be realized.

III. Market Expectation Reversal: Rate Cut Expectations Disappear, Rate Hike Probability Surges

Wall Street Turns Collective: Strong non-farm payroll data became the last straw crushing rate cut expectations. Except for a few institutions like Citibank, mainstream Wall Street investment banks have abandoned their 2026 rate cut forecasts.

Market Pricing for Rate Hikes: The interest rate swap market has fully priced in one rate hike by the Fed this year, with the December hike of 25 basis points fully incorporated, and about a 60% chance of a hike in October.

Officials' Hawkish Signals: Several FOMC voting members (such as Smith and Harker) have explicitly stated that inflation is the top risk currently. If inflation continues to rise, restarting rate hikes has been officially put on the table as an option.

IV. Key Focus and External Variables for June Meeting

Policy Statement Wording: Markets will closely watch whether the Fed will completely remove the previous language hinting at possible easing in the future.

Dot Plot Adjustments: Attention will be on whether the Fed removes the 2026 rate cut forecast or even begins to hint at the possibility of rate hikes.

Geopolitics and Energy: Middle East tensions (U.S.-Iran conflict) and oil price trends are the core external variables determining future policy directions. If oil prices fall back, rate cut expectations may warm; if inflation spirals out of control, the Fed will be forced to hike rates.