JPMorgan: Two Factors Restrain the Federal Reserve from Starting Rate Cuts, Final Decisions Often Lag Behind Economic Conditions
On May 7, JPMorgan pointed out that when the Federal Reserve is caught in a dilemma due to conflicting macroeconomic data, its final decisions often lag behind the situation. Trump is increasingly urging the Federal Reserve to lower interest rates, but the Fed is in a difficult position. JPMorgan analysts indicated that there is almost no chance of a rate cut at the Fed's policy meeting in May this week, and the likelihood of a rate cut in subsequent meetings is also very low. JPMorgan believes that there are two reasons why Federal Reserve officials are constrained in monetary policy.
The first reason is that rising inflation expectations make it difficult for the Federal Reserve to start cutting rates. The latest consumer inflation report shows that inflation rose 2.4% year-on-year in March, exceeding the Fed's 2% target. Compared to potential future scenarios, this figure is still relatively low: the one-year inflation expectation compiled by the University of Michigan is 6.5%. Trump's tariff policy is expected to increase consumer costs, which is a major driving factor for the sharp rise in inflation expectations. Concerns triggered by the trade war have exacerbated the risk of stagflation, which is the possibility that the U.S. economy could fall into stagnation while prices continue to rise. In this situation, the Federal Reserve is actually caught in a dilemma, as it cannot address both issues simultaneously.
The second reason is that macro data has not yet shown a necessity for rate cuts. Currently encouraging data masks the inflation expectation issue, and macroeconomic data remains robust, even relatively strong in some respects. Last Friday’s unexpectedly positive April non-farm payroll report boosted investor confidence and drove the stock market up. In other words, the market is not pricing in an imminent recession. JPMorgan analysts wrote: "The current forward price-to-earnings ratio of the S&P 500 Index (SPX) is 21 times, with earnings per share (EPS) expected to grow by 10% this year and 14% next year. This does not reflect any obvious concerns about a recession."
