GUOTAI JUNAN I: Wash's debut "professionalism" is the "pass" of change.

Guotai Junan released a research report looking ahead to the debut of Federal Reserve Chairman Jerome Powell. The team believes that judging from the resolution itself, there is almost no suspense in this meeting. The real focus is not on "whether to take action," but on "how to express it." "On the surface, it is a routine interest rate decision, but in reality, it is more like a redefinition of the monetary policy framework and the central bank's role." The research team believes that the main importance of Powell's first meeting is not policy actions, but the ordering of signals: how will he define inflation risks, how will he balance growth and prices, and whether he will truly reshape the Fed's communication style. The following is the content of the research report: In the complex global macro narrative at present, very few Federal Reserve monetary policy meetings have been given such heavy "symbolic significance" by the market before. Jerome Powell's first FOMC meeting as the 17th Federal Reserve Chairman appears to be a routine interest rate decision on the surface, but in reality, it is more like a redefinition of the monetary policy framework and the role of the central bank. Judging from the resolution itself, there is almost no suspense in this meeting. The market generally expects the federal funds rate to remain in the range of 3.5% to 3.75%, and the real focus is not on "whether to take action," but on "how to express it." Powell's long-standing criticism of the central bank's excessive "forward guidance" has forced the market to seriously consider a scenario that was once unimaginable: if the Federal Reserve no longer provides guidance on the path to the market, how will financial markets self-price? He has clearly stated in previous congressional hearings that he does not believe it is necessary for the central bank to constantly forecast future policy paths. This stance suggests that he may be more tolerant of market volatility and more inclined to let data, rather than communication, lead expectations. Over the past decade, the Federal Reserve has gradually developed a communication system centered on transparency and predictability, and Powell seems to be trying to loosen this consensus. However, the real constraints on policy space do not come from communication strategy but from strong signals from the bond market. While policymakers are still cautious, the market has already made a judgment: interest rates are still not high enough. In the macro environment of 2026, inflation has not continued to decline as expected, but has reared its head again under the impact of energy prices. In May, the Consumer Price Index rose by 4.2% year-on-year, well above the Fed's long-term target, and the core of this rise is the surge in energy costs triggered by the conflict in the Middle East. What is more concerning is that the behavior of the bond market is deviating from traditional logic. In past risk events, investors tended to flock to government bonds for safety, pushing down yields; but this time it is the opposite, yields are rising with the escalation of the conflict. The 10-year Treasury yield has surpassed 4.5%, and long-term rates are hovering around 5%, a change that reflects the market's greater concern about inflation and fiscal pressure, rather than simply growth risks. In other words, the bond market is transitioning from a "safe haven asset" to a "risk pricing tool," and this structural shift has deeper implications for monetary policy. If the bond market is pushing for a tighter policy environment, the stance of the White House is just the opposite. With rising economic growth pressure and consumer confidence under pressure, policy-makers are more inclined to seek lower interest rates to ease financial conditions. President Trump has openly expressed his desire for lower rates, while also emphasizing that Powell can "act in his own way," a statement that maintains formal independence but does not diminish actual policy expectations. For Powell, this means that he not only has to face the market's new expectations, but also maintain a delicate balance between politics and technical rationality. At the same time, internal divisions within the Federal Reserve are intensifying. At the May monetary policy meeting, a rare number of committee members voted against, indicating that the committee has not reached a consensus on the path of inflation and policy orientation. Following Powell's appointment, he further brought in more conservative policy advisors, and openly emphasized the need for a new framework for analyzing inflation, these changes all send a clear signal: policy discussions are shifting from "whether to adjust interest rates" to "how to define the inflation issue." This means that future policies may rely more on judgments of structural factors rather than simply following historical experience. Within this framework, the nature of inflation itself is changing. In addition to external shocks from energy prices, some more long-term factors are emerging, with the most representative being the AI investment craze. Technology giants are investing heavily in data centers, chips, and energy infrastructure, pushing up costs in multiple areas in the short term. Apollo's chief economist Torsten Slok pointed out that this round of AI expansion initially has clear inflationary properties, it directly limits the space for loose monetary policy by increasing semiconductor, energy, and labor costs. This contrasts with Powell's previous emphasis on AI bringing productivity improvements, creating a kind of timing mismatch: in the long run it may be a force for deflation, but in the short term it may exacerbate inflationary pressures. Amid these multiple intertwined variables, the market has already begun to restructure its fundamental assumptions. "Higher rates for a longer period of time" is no longer just a central bank statement, but gradually becoming the core premise of asset pricing. Short-term rates are anchored by policy, but long-term yields continue to rise, reflecting the market's reassessment of future inflation and fiscal conditions. Investors are starting to reallocate assets to adapt to an environment where interest rates are shifting higher and with higher volatility. Therefore, the real importance of Powell's first meeting is not in policy actions, but in the ordering of signals: how will he define inflation risks, how will he balance growth and prices, and whether he will truly reshape the Fed's communication style. Under the triple pressure of the White House hoping for a rate cut, the bond market pricing in a rate hike, and internal divisions within the FOMC, every statement he makes may be interpreted as the starting point for future policy paths. In a sense, this is a typical "modern central bank dilemma." When inflation once again becomes the dominant variable, and external shocks and structural changes are intertwined, traditional policy tools and communication methods no longer seem entirely applicable. What Powell is facing is not just an interest rate decision, but an institutional recalibration. It is in this context that the market's attention to the dot plot and press conference is actually a focus on the central bank's new "worldview." Because what truly determines the future financial environment is not just a rate hike or cut, but how the central bank defines issues, expresses uncertainties, and interacts with the market in the face of uncertainty. For Powell, he will emphasize professionalism and redefine the core elements of the new era's monetary policy framework through reinterpreting various economic indicators. Reduced direct communication, more listening to the market and understanding economic data, and even reducing the frequency of monetary policy meetings and cancelling dot plots are all to be expected. Although most people believe that Powell will likely "follow the established rules," his seemingly "unexpected" selection means the beginning of monetary policy reform - "professionalism" will be the pass for change.