- The latest Beige Book report released by the Federal Reserve (Fed) on Wednesday shows that U.S. economic activity has grown slightly in recent weeks. However, the rise in energy prices due to the Middle East conflict has already widely affected various vertical sectors and has become the main driving factor behind current inflationary pressures.
- The new Federal Reserve Chairman, Kevin Warsh, will preside over his first monetary policy meeting in two weeks. With core inflation indicators accelerating again and the unemployment rate expected to remain at 4.3%, there is a growing consensus within the central bank to maintain high interest rates for a longer period.
- Given that the April personal consumption expenditure inflation rate has jumped from 3.5% to 3.8%, and has been above the 2% target for more than five consecutive years, the latest qualitative data may further weaken expectations for a rate cut this year, and even make a rate hike a potential policy discussion option within the Fed.
Geopolitical Premium of Energy Costs Fully Transmitted
The Beige Book points out that the surge in energy costs triggered by the Middle East conflict has fully transmitted to multiple real economy sectors such as transportation, packaging, groceries, and fertilizers. Various districts generally report that upstream supply chain cost pressures are rapidly permeating to the consumer end, leading to a general upward trend in price levels in recent weeks. Meanwhile, business outlook expectations for the next six months have stalled due to increased uncertainty, and signs of weak consumer spending have somewhat suppressed market confidence among micro-entities.
Warsh's Policy Debut Faces Intensified Challenges
The release of this macroeconomic report comes just two weeks before new Chairman Warsh presides over his first Federal Open Market Committee (FOMC) rate decision. Warsh took over the Fed from Jerome Powell in late May. Although there were previous expectations of a policy rate cut, the recent sharp rise in gasoline prices nationwide has significantly reduced calls for an immediate easing of monetary policy. In the current macroeconomic environment, the new central bank decision-makers' concerns about rising inflation clearly outweigh concerns about economic slowdown.
Consensus on Macroeconomic Data Shifts to Longer Tightening
Recent macroeconomic indicators further reinforce the rationale for the Fed to maintain a tightening stance. Data shows that the Fed's preferred inflation indicator recorded 3.8% in April, a significant rebound from 3.5% in March, indicating that price pressures are highly persistent. Meanwhile, the previously weak labor market has shown signs of stabilization, and economists generally expect the upcoming May non-farm employment report to show the unemployment rate remaining at 4.3%. If the labor market continues to demonstrate resilience and inflation does not return to a downward path, the benchmark interest rate is likely to remain at its current level for a longer period.
Policy Variables and Reassessment of Future Rate Path
Since the beginning of the year, the Fed has maintained the federal funds rate target range between 3.50% and 3.75%. From the April meeting minutes and recent public statements by officials, there has been a fundamental shift in consensus within the decision-making body, with the previously widely expected rate cut plan for the year being substantially postponed. If future core inflation data continues to rebound beyond expectations, the central bank will not only extend the period of high interest rates but may also be forced to reassess the necessity of raising borrowing costs. In such a scenario, global asset pricing will face repricing pressures due to marginal tightening of liquidity.
