The Fed is likely to maintain a wait-and-see stance or continue until September, with the possibility of a rate cut of up to 50 basis points at that time.

Dutch international group (ING) released a research report stating that the Federal Reserve once again held steady, acknowledging that uncertainties have increased, with risks of inflation and unemployment rising. This indicates that the Fed is unlikely to take action until they have full confidence in the direction of the data, meaning that a rate cut may be delayed. However, once the Fed starts cutting rates, the magnitude of the cut may be greater. The Fed keeps rates unchanged, emphasizing increased uncertainties ING pointed out that at this week's policy meeting, the Federal Open Market Committee (FOMC) unanimously agreed to keep the federal funds rate at 4.25%-4.50%. The statement noted that the U.S. economy continues to "expand at a solid pace," labor market conditions remain "strong," and inflation "continues to rise." These statements were consistent with those from the previous policy meeting. The key change is that the Fed believes that "uncertainty about the economic outlook has increased further," and "risks to the outlook have risen, particularly with regard to higher unemployment and inflation." These comments were not particularly surprising, and the market reaction was limited. "Wait and see" stance may continue for several policy meetings Despite pressure from U.S. President Trump and Treasury Secretary Mnuchin to cut rates, these demands may continue to be ignored as Fed officials try to assess the impact of government trade policies on inflation in the face of a strong labor market. Higher tariffs are expected to push up prices, and port operators and logistics companies are warning of potential supply chain tightness risks, which could exacerbate short-term inflation threats. Therefore, the Fed is in a "wait and see" mode, with Fed Chair Powell warning last month, "Our responsibility is to keep longer-term inflation expectations stable and ensure that temporary price increases do not evolve into a sustained inflation problem." This was reiterated in the press conference following the rate decision. The Fed may delay rate cuts, but the cuts may be larger ING stated that consumer and business confidence had plummeted to levels consistent with historical recessions, which will concern the Fed. Economic uncertainties and government spending restrictions mean trade agreements and tax cuts must be reached quickly to prevent stagflationary decline. Nevertheless, ING anticipates that deflation in housing-related areas (Cleveland Fed's new renter rent series has hinted at this) will provide room for rate cuts later this year. The market tends to believe that the Fed will start cutting rates in July, but ING believes there is a risk of delayed rate cuts, with the Fed possibly starting to cut rates in September with a 50 basis point cut, like in 2024. There were no substantial comments on the balance sheet reduction process, with bond markets fluctuating around rate cut expectations ING stated that the immediate market reaction following the preliminary release of the news was a decrease in interest rates and a steepening of the yield curve, with most action focused on the real interest rate area. It is speculated that the Fed is prepared to address rising unemployment and "tolerate" the risk of rising prices. This reaction was based on some brief, relatively balanced segments in the monetary policy statement. This price reaction from the market will require further confirmation from the press conference. However, the comments at the press conference were not completely consistent with the earlier market trends, leading to a rise in market rates. Overall, market rates have slightly declined, with ING believing there is a chance for them to continue to fall based on the accumulation of macro pressures. In this scenario, the 10-year Treasury yield could easily fall into the 4% range. However, at present, the current economic conditions are solid enough to keep market rates at their current levels. There were no new developments on the balance sheet reduction (quantitative tightening) process. At the last meeting, the Fed lowered the maximum limit for balance sheet reduction to $50 billion per month, effectively zero. This means that the Fed continues to be a net buyer of Treasury securities, compared to the previous range of $20-$60 billion per month. The policy remains unchanged. Meanwhile, the maximum limit for MBS reduction remains at $35 billion per month, but this limit has not been reached, meaning that maturing MBS bonds will no longer be reinvested. The excess over $35 billion will be reinvested in Treasury bonds (which is actually rare). In the long term, the Fed aims to completely remove MBS bonds from its balance sheet, ideally replacing them with Treasury bonds. However, there were no new comments on this today. Clearly, this issue will be left for future discussion, perhaps when the market impact is less significant. Currently, the slow balance sheet reduction process continues, and can continue to progress as bank reserves remain adequate. A technical factor is the debt ceiling issue, with the U.S. Treasury consuming funds until the debt ceiling is raised or suspended, which actually increases bank reserves. Forex markets are not currently focused on the Fed Following the release of the FOMC statement, the dollar weakened slightly, but overall the currency market reaction was quite limited. Recently, the short-term interest rate differential has had little impact on cross rates, and the dollar is more under pressure from Fed concern about rising unemployment and inflation, rather than from today's hawkish or dovish tendencies. Despite a nearly 20 basis point repricing of hawkishness in the dollar OIS curve ahead of this policy meeting, the dollar rebounded weakly. The dollar is still embedded with a considerable risk premium relative to its usual market drivers (interest and stock market differentials, global risk sentiment). ING estimates that the euro against the dollar is overvalued by about 4%. However, flattening this risk premium in the market will not be smooth. Continuous trade risk mitigation positive news is a necessary condition, but this may still not be enough in the context where the market believes that tariffs have already caused substantial damage to the U.S. economy. ING believes that the euro against the dollar will continue to find support in the short term in the 1.1250-1.130 area: this range has proven to be an active area for buying on dips for most participants; overall risk balance still favors the upside for this currency pair.