Core Viewpoint - The Federal Reserve's recent meeting minutes indicate a consensus among officials to maintain the current interest rate policy due to rising economic uncertainty, reflecting a cautious approach towards inflation and employment risks [1][2] Group 1: Economic Outlook - The Federal Reserve decided to keep the federal funds rate unchanged at the range of 4.25%-4.5% for the third consecutive time, citing sufficient space to wait for clearer signals regarding inflation and economic outlook [1] - Economists believe that tariffs will likely increase inflation and suppress economic growth, with the Fed staff lowering growth forecasts for 2025 and 2026 [1] Group 2: Labor Market and Inflation - The Fed staff predicts a significant weakening in the labor market, with unemployment expected to rise above the "natural rate" this year and remain high until 2027 [2] - Inflation expectations have become a focal point for policymakers, with nearly all participants acknowledging the risk of more persistent inflation than previously anticipated [2] Group 3: Monetary Policy Framework - The minutes indicate ongoing discussions regarding the periodic evaluation of the monetary policy framework, with a potential shift towards a "flexible inflation targeting" approach, allowing inflation to exceed 2% temporarily without compensating for past deviations [2]

Core Viewpoint - The Federal Reserve's meeting minutes indicate that the benefits of the flexible average inflation targeting framework have diminished in a high-risk environment, prompting a reconsideration of the strategy [1] Group 1: Inflation Targeting Framework - Participants discussed the pros and cons of flexible average inflation targeting and flexible inflation targeting [1] - Under flexible average inflation targeting, monetary policy aims to compensate for periods of inflation below the target to achieve a 2% average inflation rate [1] - In contrast, flexible inflation targeting seeks to restore the inflation rate to 2% without compensating for previous deviations from the target [1] Group 2: Economic Environment Considerations - Participants noted that the risks associated with the effective lower bound (ELB) of policy rates are more pronounced when inflation remains persistently below target [1] - The flexible average inflation targeting framework may help limit the downward risk to long-term inflation expectations in such scenarios [1] - However, the benefits of this framework have weakened in environments with high inflation shock risks or when the risk of hitting the effective lower bound is low [1] Group 3: Policy Strategy Reevaluation - There is a consensus among participants on the need to reconsider the wording in the "Statement on Longer-Run Goals and Monetary Policy Strategy" regarding average inflation targeting [1] - An effective monetary policy strategy must be adaptable to various economic conditions [1] - Participants believe that a flexible inflation targeting strategy is a more robust policy approach to address persistent deviations from the committee's 2% long-term inflation target [1]

Economic Overview - The probability of a "soft landing" for the US economy has increased as trade tensions show signs of easing, leading to a decrease in recession risks [2] - The US GDP growth is expected to rebound in Q2 due to a decline in imports, with a strong labor market potentially delaying the Federal Reserve's interest rate cuts [2][3] - The Markit manufacturing and services PMIs for May indicate expansion, with manufacturing PMI at 52.3, the highest since February, and new orders growing at the fastest pace in over a year [2][3] Labor Market Insights - In April, non-farm employment increased by 177,000, surpassing expectations, while the unemployment rate held steady at 4.2% [4] - The labor market exhibits structural contradictions, characterized by "strong data, weak structure," which may influence the Federal Reserve's interest rate decisions [5] Federal Reserve Policy Adjustments - The Federal Reserve is adjusting its monetary policy framework to address significant changes in inflation and interest rate outlooks since the pandemic [6] - The focus of monetary policy will shift from assessing "deviations" from full employment to evaluating "shortages" in the labor market [6][7] - The Fed may consider exiting the flexible average inflation targeting framework due to its limitations in the current economic environment [7][8] Market Reactions and Asset Performance - Recent downgrades of the US credit rating and threats of increased tariffs have led to heightened market volatility, impacting the dollar and boosting gold prices [9][10] - The yield on long-term US Treasury bonds has risen above 5%, reflecting concerns over the sustainability of US debt amid rising interest expenses [10][11] - The relationship between gold prices and US fiscal deficits suggests that ongoing fiscal expansion could enhance gold's investment appeal in the long term [11]

Core Viewpoint - The Federal Reserve is considering adjustments to its monetary policy framework, particularly regarding its views on employment shortfalls and achieving inflation targets [1][2]. Group 1: Monetary Policy Framework Review - Federal Reserve officials have initiated a review of the long-term strategy for implementing monetary policy, which includes the communication tools used to guide the Federal Open Market Committee (FOMC) in achieving price stability and maximum employment [1][2]. - The current framework was designed during a period of low interest rates and low inflation, and there is a need to ensure that any new consensus statement can adapt to a wide range of economic conditions [1][2]. Group 2: Inflation Targeting - The Federal Reserve's inflation target remains set at 2%, with a focus on anchoring long-term inflation expectations around this target [2]. - The review will reflect the significant changes in the economic environment since 2020, indicating that the previous assumptions about the zero lower bound on interest rates are no longer fundamental [2]. Group 3: Employment Shortfall Definition - The review has led to an adjustment in the definition of "employment shortfall," shifting the focus to periods of high unemployment rather than equally weighing high and low unemployment rates [2]. - This change reduces the tendency for preemptive interest rate hikes aimed at cooling the labor market before inflation pressures arise [2]. Group 4: Response to Inflation - The Federal Reserve's previous framework has been criticized for not responding timely to inflation post-pandemic, with some observers suggesting that the focus on employment targets contributed to this delay [2][3]. - Powell refuted claims that the policy framework caused a lag in response, stating that officials initially judged the inflation caused by the pandemic to be temporary [3]. Group 5: Timeline for Review Completion - The Federal Reserve intends to complete the current framework review by the end of summer this year [4].

Core Viewpoint - The Federal Reserve is undergoing a significant reassessment of its management approach, termed "Monetary Policy Framework Review," which aims to better address economic shocks and policy uncertainties created by the U.S. government [1] Group 1: Key Recommendations - Return to a symmetric 2% inflation target to reduce market confusion and prepare for potential zero lower bound risks [1] - Align employment level targets with the 2% inflation goal to avoid prolonged low-interest rates despite rising inflation and a strong economy [1] - Establish a clear framework for quantitative easing and tightening to differentiate between market stabilization and economic stimulus [3] Group 2: Economic Forecasting and Guidance - Publish multiple economic scenarios to help the market understand potential Federal Reserve responses under different conditions, enhancing the effectiveness of monetary policy [4] - Develop forward guidance norms that clarify conditions under which low interest rates apply, reducing market misinterpretations [5] Group 3: Additional Reforms - Shift the policy anchor from the federal funds rate to the reserve rate to avoid conflicts with quantitative easing [5] - Exclude reserves from bank leverage calculations to prevent conflicts with quantitative easing [5] - Establish a mechanism to assess the impact of monetary policy on financial stability [5]