On May 1st, the Federal Reserve will announce its latest interest rate decision. It has become a consensus in the market that the Federal Reserve will remain on hold in May.

In terms of inflation data, although the core personal consumption expenditure price index (PCE) excluding food and energy rose at a rate of 3.7% in the first quarter, far exceeding market expectations, the annualized growth rate of the U.S. Gross Domestic Product (GDP) in the last quarter was only 1.6%, lower than the long-term sustainable growth rate of 1.8%, indicating that the growth rate of the U.S. economy has fallen to its slowest in two years.

Under the pressure of high interest rates, the U.S. economy is already moving forward with a heavy load. The S&P Global U.S. Manufacturing Purchasing Managers' Index (PMI) in April has once again fallen below the boom-bust line, and the Services PMI has dropped from 54.0 in March to a five-month low of 50.9 this month. Recent data from U.S. financial institutions also show that low-income borrowers are increasingly finding it difficult to repay loans. The business confidence of Americans has also dropped to its lowest level since November last year.

The job market is one of the few pieces of good news in the U.S. economy recently. The labor market in the United States remains tight, and the number of initial jobless claims continues to be low. However, this also increases the risk of inflation stickiness. Affected by this, most Federal Reserve officials, including Powell, have already shifted to a hawkish stance, and the Federal Reserve officials have further reduced the median number of rate cuts expected to 2 times or 1 time. The market has also pushed the medium and long-term U.S. Treasury yield to a high since November last year.

Under such circumstances, the market expects the Federal Reserve to continue to remain on hold. Allowing the U.S. economy to continue to be exposed to a high-interest-rate environment to further suppress inflation. However, due to inflationary pressures, it is not ruled out that the Federal Reserve may announce a slowdown in the pace of quantitative tightening at this meeting.

Guojun Macro stated that the Federal Reserve is expected to start in June, maintaining the monthly reduction limit of Mortgage-Backed Securities (MBS) at $35 billion unchanged, but reducing the reduction limit of U.S. Treasury bonds from the current $60 billion/month to $30 billion/month, or even lower; Danske Bank, on the other hand, stated that policymakers prefer to adopt a "gradual adjustment" approach to the pace of balance sheet reduction to avoid a repeat of the 2019 liquidity crisis. The bank believes that, in any case, the decision will not have a significant impact on financial conditions.

In addition, the Federal Reserve's future path of rate cuts is also expected to be bumpy. According to the Federal Funds rate futures, the market has set the Federal Reserve's year-end interest rate cut space at 36 basis points, which is not even enough for two rate cuts.
Oriental Gold Credit stated that with the U.S. economy and inflation both maintaining unexpected resilience, we believe there is basically no motivation or possibility for a rate hike in the first half of the year. Considering the previously released inflation rate has shown a comprehensive rebound, the outcome of the May interest rate meeting is already a foregone conclusion, that is, the Federal Reserve will continue to maintain the interest rate unchanged. 

After the release of the first quarter GDP and PCE inflation data, the economic resilience will further raise the threshold for the Federal Reserve's future rate cuts, which means the timing of the Federal Reserve's rate cuts will be further delayed. In fact, the current market consensus is that the Federal Reserve's rate cut is likely to wait until after September, and some Federal Reserve officials are even discussing the possibility of a rate hike.

Hu Jie, a professor at the Shanghai Advanced Institute of Finance of Shanghai Jiao Tong University, stated that the recent GDP growth rate has declined, but it is still in a good positive range, and the inflation rate is fluctuating and may even rebound. Therefore, it is judged that the Federal Reserve will continue to maintain the interest rate unchanged. Based on the current trend, the probability of a rate cut before September is not high.

Swiss Pictet pointed out that at the upcoming Federal Open Market Committee meeting, it is expected that the Federal Reserve will adopt a hawkish stance. Federal Reserve Chairman Powell will hint that the data suggests the timing of rate cuts will be later, and the number of rate cuts will be reduced. "We expect that a gradual slowdown in inflation and moderate demand will prompt the Federal Reserve to cut rates twice this year, but it tends to be later in the year and with fewer rate cuts. The threshold for a rate hike this year will be very high. If Powell is more open to this approach (later and fewer rate cuts) next week, it will be a hawkish outcome.