At the recently concluded April FOMC meeting, the Federal Reserve held on schedule and kept interest rates high for more than 20 years. However, the policy statement after the meeting remained dovish, implying that future interest rate cuts are more likely than interest rate hikes.

Nick Timiraos, a reporter from the New Federal Reserve News Agency and the Wall Street Journal, wrote that the current market's tendency to determine the Federal Reserve is not that important; what is more critical is economic and inflation data.

There are two schools of opinion within the Federal Reserve

Within the Federal Reserve, some officials have been worried that keeping interest rates too high for too long, particularly as inflation and wage growth are slowing down, putting pressure on the economy.

Keeping interest rates at their highest level in 20 years for a longer period could put more pressure on regional banks, commercial real estate investors, and other industries, which were particularly vulnerable before the rapid rate hikes in the past two years.

Another faction believes that due to the strong economy, there is almost no need to cut interest rates this year. They are concerned that when the Federal Reserve sets an inflation target of 2%, the inflation rate may stay well above 2.5%. Before considering cutting interest rates, these officials want more evidence that the economy is slowing down.

The latest data provides more support for the latter and raises the possibility that officials will wait to see more evidence of an economic slowdown before cutting interest rates.

Inflation data means everything

Nick Timiraos emphasized that a series of disappointing inflation and wage data released this year has led investors to pay less attention to the future of the Federal Reserve's policy, and more attention to inflation data.

Neil Dutta, head of economic research at Renaissance Macro Research, told the media:

Powell can say whatever he wants, but ultimately the inflation data will decide everything.

William English, a former senior adviser to the Federal Reserve, believes that if inflation continues to exceed expectations, the Fed may need to reverse the dovish tone and leave more room for interest rate hikes.

Powell also stressed at a press conference on Wednesday that current interest rates are still restrictive enough. Powell cited several signs that interest rates are holding back demand, including slowing employment and falling turnover rates. Inflation will eventually fall, partly because the effects of falling rental prices have not yet been fully reflected in official data.

He believes it is unlikely that the Federal Reserve will resume rate hikes, but still added that the specific course of action depends on the data:

As far as peak interest rates are concerned, I think... data must answer this question for us.

Some analysts pointed out that at present, economic sectors that are sensitive to interest rates, such as real estate and manufacturing in the US, may have withstood the impact of the Federal Reserve's interest rate policy, thus creating a risk that the tight labor market will cause economic growth to accelerate again and inflation to pick up again.

If inflation stays around 3%, the Federal Reserve may face a series of more difficult conversations. Diane Swonk, KPMG's chief economist, said she expects some Fed officials to continue austerity in this situation, although “this is not what Powell wants.”

Editor/Jeffrey