The Federal Reserve's May Meeting Minutes Release 'Stagflation' Warning; Policy Path Falls into Dilemma
On May 29, the Financial Association reported that the latest minutes from the Federal Reserve's May FOMC meeting show that monetary policymakers are facing the dual challenge of persistent inflation and weakening economic momentum. Although they decided to keep interest rates unchanged as expected, concerns among decision-makers about the risks of 'stagflation' have significantly intensified, leading to a cooling of market expectations for interest rate cuts within the year.
Policy Maintained but with Subtle Changes in Tone
At the May interest rate meeting, the Federal Reserve unanimously agreed to maintain the federal funds rate target range at 4.25%-4.5%, in line with market expectations. However, the meeting minutes revealed three key changes:
Risk Statement Upgrade: For the first time, they explicitly warned that 'the risks of rising unemployment and rising inflation are both intensifying,' a clear shift from the 'risks are becoming balanced' statement in April;
Increased Policy Flexibility: The statement of 'maintaining a restrictive stance' was removed, changed to 'will adjust policy as appropriate';
Strengthened Data Dependence: Emphasized the need for more evidence to confirm the trend of falling inflation, particularly in housing and service sector prices.
Increased Disparity in Economic Outlook
The meeting minutes indicated a clear divergence within the Federal Reserve regarding economic trends:
'Hawks' Worry About Stubborn Inflation: Some committee members believe that if core PCE inflation remains above 3%, further tightening may be necessary;
'Doves' Focus on Cooling Job Market: Other committee members pointed out that the unemployment rate has risen for two consecutive months to 4.1%, and wage growth has slowed, necessitating caution against excessive tightening risks.
Market Reacts Strongly
Following the release of the minutes, financial markets quickly adjusted expectations:
Interest Rate Futures: Traders lowered the expectation for rate cuts in 2025 from 3 times (75BP) to 1-2 times (25-50BP), and the probability of no movement in June rose to 92%;
U.S. Treasury Market: The 2-year yield jumped 8BP to 4.83%, while the 10-year yield rebounded to 4.42%;
Foreign Exchange Market: The U.S. dollar index broke through the 105 mark, putting pressure on non-U.S. currencies.
Future Focus
Analysts generally believe that the Federal Reserve has entered an 'observation period,' and future policy direction will depend on three major variables:
June CPI Data (to be released on June 11): If core inflation fails to fall below 3.5%,
