- The Federal Reserve (Fed) maintained the federal funds rate in the range of 3.50% to 3.75% during the April meeting, with a vote of 8 in favor and 4 against, marking the largest internal division since 1992.
- Geopolitical conflicts have continued into the tenth week, with uncertainty in oil supply driving up expectations of imported inflation. The U.S. unemployment rate stabilized at 4.3% in April, with the resilience of the labor market limiting short-term easing space.
- Major Wall Street institutions are reassessing the path of benchmark interest rates. Bank of America (BAC:US) has withdrawn its pricing for rate cuts within the year and postponed the expectation of a 50 basis point easing to the second half of 2027. Goldman Sachs (GS:US) has delayed its first rate cut to December.
Policy Tone and High-Frequency Data Analysis
Entering the second quarter of 2026, the Federal Reserve's monetary policy framework is facing dual challenges from external supply-side shocks and internal demand resilience. The April non-farm employment report shows that at the current restrictive interest rate level of 3.50% to 3.75%, the U.S. labor market continues to expand, with the unemployment rate remaining at a historically low level of 4.3%. Wage growth supports consumption in the service sector, resulting in strong core inflation stickiness. Coupled with the ten-week-long Middle East geopolitical conflict pushing up prices of crude oil and other commodities, the pressure of imported inflation has significantly increased, directly weakening the macroeconomic foundation for a short-term policy shift.
Comprehensive Restructuring of Investment Bank Pricing Models
Facing the nonlinear characteristics of the inflation path, major commercial and investment banks have swiftly adjusted their fixed income pricing models. Bank of America's (BAC:US) latest report has removed all assumptions of rate cuts within 2026, expecting policy rates to remain high until the second half of 2027, with a potential total reduction space of 50 basis points. Goldman Sachs (GS:US) has similarly revised its macro baseline scenario, postponing the first rate cut window from September to December. The collective convergence of sell-side institutions' expectations marks a market repricing of a long-term high-interest rate environment, with the mid and long ends of the risk-free yield curve facing revaluation pressure.
Tail Risks and Marginal Change Expectations
Incoming Federal Reserve Chairman Kevin Warsh is about to take office, and market participants are closely watching for marginal changes in his monetary policy framework. Following the historic 8 to 4 split vote, the Federal Open Market Committee faces increased difficulty in balancing the fragility of economic growth with the risk of a second inflation rebound. If the central energy price continues to rise in the third quarter, or if the month-on-month growth rate of the core personal consumption expenditures price index fails to effectively decline, the market's pricing for easing before the end of the year may face further clearing. In the current macroeconomic environment, high-dividend defensive asset allocation and commodity-related exposures,
