Zhongjin: It is less likely that the Federal Reserve will raise interest rates this year. The next rate cut may be postponed to the fourth quarter.

CICC report stated that the Federal Reserve maintained interest rates unchanged at its April meeting, which was in line with market expectations. However, four officials voted against it, with three opposing the inclusion of accommodative language, showing that the monetary policy stance is becoming more cautious. The high oil prices caused by the US-Iran conflict combined with the previous tariff effects have made the inflation environment more complicated. Supply shocks have become the new normal, meaning that the space for monetary easing has been compressed and the threshold for rate cuts will be raised. This meeting also marks the last interest rate meeting under Powell's leadership of the Federal Reserve, although his successor, Wash, has indicated a signal of balance sheet reduction and rate cuts, constrained by the committee decision-making mechanism, it may be difficult to push for rate cuts in the short term. CICC believes that the Fed's likelihood of raising interest rates this year is low, but the road to rate cuts will be longer, with the next rate cut potentially delayed until the fourth quarter. Key points from the CICC report: The biggest change in this meeting was the four officials voting against it. Cleveland Fed President Mester, Minneapolis Fed President Kashkari, and Dallas Fed President Kaplan opposed the inclusion of "accommodative language" in the monetary policy statement, while Board Member Brainard voted in favor of a 25 basis points rate cut. This shows that there is increasing divergence within the Federal Reserve on monetary policy, with some officials becoming more cautious given inflation's failure to converge to the 2% target. The background of this attitude change is that the US-Iran conflict has caused a global oil supply shortage, leading to a sustained rise in oil prices and posing new upside risks to US inflation. Normally, the Fed tends to view geopolitical events that raise oil prices as "temporary shocks" and chooses to "ignore" them in monetary policy. However, this situation seems different - as of now, substantive progress has not been made in US-Iran peace negotiations, the Strait of Hormuz remains closed, and high oil prices are turning from short-term disturbances into sustained pressure. At the same time, the inflation transmission effects from the previous tariffs have not completely faded, and multiple factors combined make the inflation environment even more complex, forcing the Fed to be more cautious. It is worth noting that this recent rise in oil prices is not an isolated event but a reflection of the increasing frequency of supply shocks in recent years. In the past five years, we have experienced: the 2020 global supply chain disruptions caused by the COVID-19 pandemic, the 2022 Russia-Ukraine conflict driving up oil prices, the 2025 tariff policy disrupting commodity trade, and this year's US-Iran conflict transmitting to inflation through oil prices - supply shocks are evolving from occasional events to a new normal. Monetary policy is mainly used for demand adjustment, lacking effective means to respond to supply shocks. The normalization of supply shocks means that the Fed's policy space is limited, the threshold for rate cuts will be raised, and monetary easing will face greater resistance. Another focus of this meeting is that this is Powell's last interest rate meeting as the Fed chair. Meanwhile, his successor, Wash, has passed the Senate Banking Committee vote, bringing him one step closer to his formal appointment as the next chair. A question that the market is concerned about is whether Wash can push for earlier and faster rate cuts after taking office? Indeed, Wash signaled "balance sheet reduction + rate cuts" policy at last week's Senate hearing: gradually reducing the balance sheet while placing interest rate tools at the core and striving to push for credible rate cuts. However, considering the current situation, it may be difficult to push for rate cuts in the short term. The Fed's policy is not decided by one person but by the committee's collective decision. From the dissenting votes of several regional Fed officials today, it can be seen that if the inflation outlook does not substantially improve, they are unlikely to endorse rate cuts. Relying solely on Wash's policy inclination may not be enough to shake the overall voting pattern of the committee. In addition, Powell stated at the press conference that he will continue to serve as a board member after stepping down as chair. The reason he gave was that the Justice Department investigation has not yet been fully completed, and leaving abruptly at this time would not be conducive to maintaining the Fed's independence. This means that during the early stages of Wash's tenure, there will be a delicate transitional period within the Fed, and the policy inclination may continue the current tone for some time. We maintain the previous judgment: the likelihood of the Fed raising interest rates this year is low, but the threshold for rate cuts will be raised. International oil prices continue to run at high levels, and their transmission effects on gasoline, airfares, and broader commodity prices will gradually become more apparent over time. This may push US inflation higher in the second quarter and keep overall inflation high in the second half of the year. Based on this, we expect the next rate cut to be delayed until the fourth quarter. If the labor market deteriorates beyond expectations, the timing of rate cuts may be brought forward accordingly.