Fed: June meeting tests new chair – DBS

§ 01 Executive Snapshot

• What: The upcoming June FOMC meeting will test new Fed Chair Kevin Warsh amid a divided committee.
• Who: Kevin Warsh (Fed Chair), FOMC members, Philip Wee (DBS Group Research).
• Why it matters: The meeting could signal a shift towards lower US interest rates as inflation trends evolve.

§ 02 Key Developments

• The US Treasury 10Y yield eased by 11 bps in the first four days of this week to 4.447%, down significantly from its 4.685% peak on May 19.
• US PCE inflation decelerated from 0.7% MoM in March to 0.4% in April, while Core PCE inflation slowed to 0.3% to 0.2%.
• Year-over-year, headline inflation rose to 3.8% from 3.5%, raising concerns among some Fed members about the real Fed Funds Rate being below its neutral zone.

§ 03 Strategic Context

• The Fed's decisions on interest rates are crucial in determining the economic landscape, especially in light of inflation trends and real interest rates.
• The divided stance within the FOMC reflects broader uncertainties in monetary policy, impacting market expectations and economic forecasts.

§ 04 Strategic Implications

• Immediate implications include potential market volatility as investors react to the FOMC's decisions and guidance on interest rates.
• Long-term, the outcome of this meeting could set the tone for future Fed policies and economic recovery strategies, influencing investment and spending behaviors.

§ 05 Risks & Constraints

• Potential risks include further inflationary pressures that could lead to tighter monetary policy, impacting economic growth.
• The divided FOMC could create inconsistencies in policy guidance, leading to market confusion and volatility.

§ 06 Watchlist / Forward Signals

• Key dates to watch include the June 16-17 FOMC meeting, where Warsh will face his first major test.
• Monitoring inflation trends and Treasury yields will provide signals on the Fed's future direction and market sentiment.