The Federal Reserve maintained the policy interest rate unchanged at its June meeting, in line with expectations. Despite the previously released May inflation data showing a slowdown, the Fed still exhibited a cautious stance. Officials raised their forecasts for core PCE inflation, and the dot plot indicated a reduction in the number of rate cuts expected within the year from three to one, which aligns with our mid-term outlook report. More importantly, the Fed also raised its forecasts for long-term interest rates, implying that the neutral rate may rise, and high interest rates staying at elevated levels for an extended period could become the new normal. However, high interest rates do not necessarily mean tight monetary policy; if the neutral rate rises, higher rates could also be accompanied by loose financial conditions, not hindering the rise of risk assets.

This FOMC meeting coincided with the release of the U.S. CPI inflation data. Previous data showed that the U.S. CPI increased by 3.3% year-on-year in May (previously 3.4%), and the core CPI increased by 3.4% year-on-year (previously 3.6%), both slowing down from the previous month and growing at a rate lower than market expectations. Looking at the breakdown, the "supercore" inflation, which the Fed pays more attention to and excludes housing, fell to zero growth month-on-month, mainly affected by a significant drop in airfare prices and a shift from a large increase to a slight decrease in auto insurance prices. Rent inflation remains robust, and core goods inflation remains low. Overall, this set of inflation data reduced market concerns about "second-round inflation," providing some groundwork and confidence for the Fed to cut rates within the year.

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However, the Fed did not appear very "dovish" due to one month's data. Considering the latest inflation drop, the Fed modified its wording in the monetary policy statement, changing the "lack of further progress" in achieving the 2% inflation target in recent months to seeing "modest further progress." But one month of "surprisingly" low inflation data is still not enough to change the Fed's "vigilant" attitude after seeing inflation exceed expectations in the first quarter. Powell stated that more good data is needed to support confidence that inflation can sustainably fall back to the 2% target.

The Fed raised its inflation forecasts and reduced its prediction for the number of rate cuts within the year to one, which is in line with our mid-term outlook report. Since the March FOMC meeting, although the U.S. Q1 GDP growth did not meet expectations, excluding the disturbances from imports and inventory, the final demand of the domestic private sector still has a quarterly annualized growth of 2.8%, indicating that domestic demand remains strong. The labor market remains robust, with 272,000 non-farm jobs added in May, showing that the economy is still absorbing employment. In response, the Fed kept its Q4 GDP growth forecast for this year at 2.1% unchanged, and the year-end unemployment rate at 4.0% unchanged. The Fed also raised its Q4 core PCE inflation forecast from 2.6% to 2.8%, and the PCE inflation forecast from 2.4% to 2.6%, but this mainly reflects the impact of inflation exceeding expectations in the first quarter consecutively.

Regarding the dot plot, in March, 10 officials believed that three or more rate cuts were appropriate, while this time all officials believe that two or fewer rate cuts are appropriate. Among them, 4 people believe that there should be no rate cuts within the year, 7 people believe that one rate cut is appropriate, and 8 people believe that two rate cuts are appropriate. Looking at the median, the number of rate cuts within 2024 is reduced to one, but the number of rate cuts in 2025 increased from three to four, showing that Fed officials are inclined to be patient within this year, but the dot plot also shows that if the economy weakens next year, the Fed can make more rate cuts. No official in the dot plot indicated a desire for further rate hikes, which is consistent with Powell's previous statement excluding the possibility of rate hikes.

The Fed also raised its forecast for the long-term policy rate, which means that the neutral rate may rise, and current monetary policy is not as tight as imagined. The Fed raised its policy rate forecast for the end of 2025 from 3.9% to 4.1%, kept the rate forecast for the end of 2026 at 3.1%, and further raised the long-term rate forecast to 2.8% after raising it to 2.6% in March. Although Powell himself said at the press conference that the long-term rate is an unobservable long-term equilibrium theoretical concept, the continuous increase is enough to show a shift in the Fed's attitude, that is, the end point of the policy rate may not be too low. Powell also said that officials have reached a consensus that rates are unlikely to return to pre-pandemic levels. This means that the neutral rate may rise, and the new normal will be for rates to stay at higher levels for a longer period. We believe that the rise in the neutral rate also means that current monetary policy is not very tight, and the Fed does not actually want to over-tighten.

The rise in the neutral rate also reflects the three forces affecting the U.S. in the medium and long term—fiscal expansion, technological innovation, and deglobalization. As we stated in our mid-term outlook report, fiscal stimulus is beneficial for growth but also brings inflationary pressures; technological innovation is a sustainable force for long-term economic growth and inflation suppression, but its success needs time to be tested; deglobalization both curbs economic growth and increases inflation risks, with a "stagflation" effect. The superposition of the three forces, the final impact depends on the strength of each force. For the U.S., a possible scenario is that the potential economic growth rate rises, the inflation center rises, and the level of the neutral rate also rises.