New York Federal Reserve News Agency: The Federal Reserve is very cautious about this rate cut, fearing a repeat of past mistakes

The US May CPI data shows that inflation has significantly cooled down, yet the hawkish signal from the FOMC meeting of the Federal Reserve has caught the market by surprise. The Federal Reserve did not follow the trend of global interest rate cuts, and the interest rate decision remains unchanged.

The Federal Reserve's dot plot still indicates only one rate cut this year, and the Federal Reserve remains hesitant about the interest rate policy path. Nick Timiraos, a well-known financial journalist known as the "New Fed News Agency," hinted that behind the Federal Reserve's cautious attitude towards this rate cut may be the officials' "PTSD (post-traumatic stress disorder)" from repeated misjudgments of economic and inflation data.

Fear of repeating mistakes, more confidence needed for rate cuts! Powell mentioned "confidence" 20 times

After the overnight interest rate decision, Federal Reserve Chairman Powell emphasized at the press conference that the inflation data so far this year is not enough to give the Federal Reserve confidence to cut rates, and more data is needed to boost confidence.

In his latest article, Nick Timiraos pointed out that the Federal Reserve is cautious due to past mistakes. The Federal Reserve pays close attention to monthly inflation data because over the past three years, the US economy, especially inflation data, has been difficult to predict, which may have caused Federal Reserve officials to suffer from "PTSD."

In recent years, the Federal Reserve has repeatedly stumbled in judging inflation and economic data. In 2021, the pandemic caused inflation to rise, yet officials like Powell repeatedly emphasized that the inflation caused by the COVID-19 pandemic was only a "temporary" phenomenon and did not take timely tightening measures. In November of that year, the US core PCE price index rose by 4.7% year-on-year, the fastest pace since the 1990s, but the Federal Reserve waited four more months before implementing the first "belated rate hike," severely tarnishing its reputation.

By the end of 2023, Federal Reserve officials signaled a slowdown in inflation, and Powell openly discussed the topic of rate cuts. The market also raised expectations for a Federal Reserve monetary policy shift (Fed pivot). However, in the first quarter of this year, US inflation data repeatedly exceeded expectations, causing rate cut expectations to plummet, and the Federal Reserve suffered a setback.

Jan Hatzius, Chief Economist at Goldman Sachs, said, "After experiencing such events, you will be more concerned about your reputation. You don't want to make the same mistakes again."

Therefore, it is not surprising that Powell repeatedly emphasized the need for more "confidence" in rate cuts. Powell used words like "confident/confidence" 20 times during the press conference. Powell said, "We are looking for evidence that convinces us that inflation is continuing to decline."

How to proceed with future rate cuts? Federal Reserve: Verify and re-verify!

How will the Federal Reserve, which needs continuous "confidence" support, act on the interest rate decision path?

According to "New Federal Reserve News Agency" Nick, Powell's attitude towards inflation and rate cuts can be described in one sentence: "Trust, but verify". From the signals released at Powell's meeting, he sees data showing a slowdown in inflation, but he still emphasizes the need for more evidence of inflation "continuing to decline".

However, in Nick's view, the Fed's continued wait-and-see approach to verify inflation may put it in a dilemma. Waiting for Powell and his colleagues to confirm the decline in inflation before taking action may be too late to avoid a more serious decline in employment. Powell also acknowledged this during Wednesday's press conference.

Powell said, "We fully understand the risks involved - and that's not our plan, we won't wait until things happen to try to solve them."

In addition to waiting for further inflation data, Nick mentioned that another option for the Fed is to wait until the economy weakens further before starting to cut rates.

There are also views suggesting that the Fed may follow the "hawkish rate cut" of the European Central Bank. Goldman Sachs economist Hatzius stated that the Fed may ultimately follow the strategy of the European Central Bank. Hatzius said, "They (the European Central Bank) have taken a small step now, but they will not commit to entering a predominantly loose cycle." Last week, the European Central Bank cut interest rates for the first time in five years, but did not commit to further easing monetary policy, which was also interpreted by the market as a "hawkish rate cut".

In his article, Nick also cited an example from 1995 when former Fed Chairman Alan Greenspan took a special approach to rate cuts, cutting rates once in July of that year, and then not following a regular rate cut schedule, but taking another rate cut measure after 5 and a half months.

Nick stated that Powell considers rate cuts to be a very significant decision, but he downplays the importance of the exact month of the rate cut