Core Viewpoint - The Federal Reserve decided to maintain the federal funds rate in the range of 4.25% to 4.5%, with a significant reduction in the market's expectation for a rate cut in September from 65% to below 50% [1][2][8]. Group 1: Federal Reserve Meeting Outcomes - The Federal Reserve's decision was supported by a 9-2 vote, with two members advocating for a 25 basis point rate cut, marking the first time since 1993 that two members opposed the chair's decision [4]. - The meeting statement included new language indicating "economic activity has slowed in the first half of the year," reflecting concerns about growth momentum [4]. - There is a shift in focus from solely inflation to also considering employment market risks, suggesting that if employment deteriorates, the Fed may prioritize action [4][8]. Group 2: Future Policy Outlook - The potential for a rate cut in September will depend on upcoming economic data, particularly regarding inflation and employment [7]. - If inflation data shows an increase due to tariffs or rising import prices, it could delay any rate cuts [7]. - The current unemployment rate is stable, but weak corporate investment and reduced immigration could lead to job market deterioration, with a threshold of 4.5% unemployment potentially triggering a rate cut [7]. Group 3: Market Impact - Following the Fed's meeting, market expectations for a September rate cut decreased significantly, with the annual expected rate cuts revised from 2.2 to 1.8 times [8]. - The risk of "moderate stagflation" in the U.S. economy is rising, with second-quarter real private consumption growth at only 1.2% and weak corporate capital expenditures [8]. - Short-term market volatility increased, with declines in U.S. stocks, rising bond yields, and a stronger dollar, reflecting the market's absorption of the Fed's hawkish signals [10]. Group 4: External Variables - Political pressure from former President Trump on Fed Chair Powell regarding rate cuts poses a challenge to the Fed's independence [10]. - Ongoing trade negotiations, particularly with China, Canada, and Mexico, could impact inflation risks if tariffs are escalated [10].

Economic Overview - The Federal Reserve's recent decision to maintain interest rates has raised concerns about the U.S. economy potentially entering a phase of mild stagflation, contrasting sharply with the Trump administration's assertive external posture, which masks underlying fiscal and economic challenges [1][9]. Capital Flows - The U.S. Treasury's International Capital Flow report indicates significant sell-offs of U.S. Treasury bonds by foreign nations, with China selling $8.2 billion and Canada $57.8 billion in April, intensifying pressure on the U.S. Treasury [3]. - In contrast, Japan increased its holdings of U.S. Treasuries by $3.7 billion, maintaining its position as the largest foreign holder at $1.13 trillion, while the UK added $28.4 billion, holding $807.7 billion, showcasing strategic support for the U.S. despite its own economic challenges [5]. Monetary Policy - The Trump administration is under pressure to lower dollar interest rates to reduce the cost of issuing debt, but Federal Reserve Chairman Jerome Powell's stance remains hawkish, with indications that interest rates will not decrease through 2025 [7]. - Powell acknowledged that tariff policies are raising U.S. prices and that the economy may be entering a mild stagflation phase, which has led to a significant reduction in expectations for interest rate cuts in 2025 and 2026 [9]. Economic Indicators - The U.S. Economic Surprise Index has dropped to its lowest point in nine months, indicating that most economic data is falling short of expectations, suggesting a contraction in economic activity [9]. - The semiconductor industry, a key sector for the U.S., has seen sales decline to $16 billion in April, a 24.6% year-over-year drop, and a 10.5% decrease compared to the last quarter of 2024, reflecting broader economic struggles [9].

Group 1 - The US stock market has experienced fluctuations due to escalating tensions in the Middle East and the Federal Reserve's decisions, with the Dow Jones remaining within a range of 42,700 to 42,600 this week [1] - The Federal Reserve's latest monetary policy stance is interpreted as hawkish, maintaining the overnight interest rate target range at 4.25%-4.50%, with a warning from Chairman Powell about potential inflation from tariffs [3] - The Fed's economic forecast indicates a mild stagflation scenario, with expected economic growth slowing to 1.4% this year, an unemployment rate of 4.5%, and inflation reaching 3% [3] Group 2 - Current stock risk exposure is high enough to trigger significant risk-averse actions, while also being low enough to encourage buying on dips, indicating that any minor event could lead to volatility in the US stock market [4] - Hedge funds continued to buy stocks last week, but at a slower pace, while mutual funds saw an outflow of $10 billion, indicating a cautious market sentiment [6] - The upcoming rebalancing by pension and target-date funds, which are expected to sell $89 billion worth of stocks, may further weigh on the market in the coming days [4] Group 3 - As trade tensions ease, there is a partial recovery in US economic confidence, but investors are advised to reconsider geopolitical issues before increasing positions, as the Middle East situation could catalyze further market volatility [7] - The potential for rising energy prices due to prolonged Middle Eastern conflicts could exacerbate inflation fears, negatively impacting the US stock market [7]