Is the Federal Reserve more dovish than market expectations? Is a rate cut in June inevitable?

According to the Zhitong Finance and Economics APP, a series of recent data showing the stickiness of inflation and the resilience of the U.S. economy has led some investors to expect that the Federal Reserve may lean towards a more hawkish stance at this week's policy meeting, potentially triggering a market pullback. However, the latest dot plot released by the Federal Reserve on Wednesday shows that policymakers still expect to cut interest rates three times by the end of this year. This dynamic indicates that the Federal Reserve is more dovish than what the market has recently reflected.

In addition, Federal Reserve Chairman Powell stated, "The risks to the achievement of our inflation and employment goals are now more balanced." Powell also hinted that quantitative tightening (QT) should be slowed down and may soon come to an end. The ongoing shift in monetary policy suggests that the Federal Reserve may soon embark on a rate-cutting cycle and may open the door for a new round of quantitative easing next year if necessary.

Following the Federal Reserve's interest rate decision, the market currently expects a 76% probability of at least a 25 basis point rate cut by the Federal Reserve in June, up from around 60% before the interest rate decision was announced. Therefore, the market is moving towards faster rate cuts, rather than maintaining high rates for a longer period as previously expected. Furthermore, the market believes that there is a close to 90% probability of a rate cut by the Federal Reserve in July or earlier, with about a 40% chance of two rate cuts before the end of July.

Of course, the market favors the dovish stance of the Federal Reserve. The S&P 500 index has risen nearly 10% this year, and despite possible rotations/consolidations/pullbacks in the near future, there may still be significant upside potential. The Federal Reserve seems to be proceeding as planned. Some analysts point out that due to constructive factors surrounding the market and the economy, the S&P 500 index could rise to the range of 5800-6000 points by the end of the year.

In recent times, investors' views on the Federal Reserve and its monetary policy have fluctuated greatly. At the beginning of the year, the market was overly optimistic, expecting six rate cuts in 2024. However, recently, many market participants have begun to question whether the Federal Reserve will cut rates in the summer, delaying the expectation of the first rate cut to the fall, and some even believe that the Federal Reserve may raise rates again in the coming months.

The market has become so hawkish because the U.S. labor market remains strong, inflation is still high, and shows stickiness. The year-on-year increase in U.S. CPI fell to a low of 3% in June 2023 and has since hovered between 3.1% and 3.7% In addition to CPI, PPI has also exceeded expectations in the past two months, triggering market concerns about a resurgence of inflation.

However, the core PCE data favored by the Federal Reserve may provide some comfort to the market. Although the year-on-year growth rate of the core PCE price index remains around 2.8%, it is trending downwards and may further decrease in the coming months. This could reinvigorate market expectations of a rate cut by the Federal Reserve and support the Fed in initiating a loose monetary policy cycle