Major Outlook! Escalation of Middle East Situation + Weak Economic Data Complicates Federal Reserve's Rate Cut Prospects

FX168 Financial News (North America) reported that on Tuesday (June 17), as the Federal Reserve is about to begin a two-day policy meeting, escalating tensions in the Middle East and the upcoming release of weak U.S. retail and manufacturing data have made the market more cautious about the monetary policy outlook. Analysts pointed out that the current environment may again pose upward pressure on inflation, increasing the uncertainty of the policy path.

The market generally expects the Federal Reserve to maintain the federal funds benchmark interest rate in the range of 4.25%-4.50%, which has remained unchanged since last December, and will reiterate that it is difficult to provide clear policy guidance until the impacts of the Trump administration's tariff policies and fiscal stimulus become clearer. Although U.S. President Donald Trump continues to urge the Federal Reserve to "cut interest rates immediately," most policymakers remain on the sidelines.

However, in recent days, missile exchanges between Israel and Iran have triggered a surge in international oil prices, which may add variables to the Federal Reserve's decision-making, as it could lead to new imported inflation. Nevertheless, as the Iranian government is reported to be seeking negotiations with the U.S. and Israel for a ceasefire, oil prices and U.S. Treasury yields both fell on Monday, while major U.S. stock indices closed higher.

Despite this, the conflict highlights the root of the internal policy differences within the Federal Reserve: since Trump resumed office in January, the introduction of unexpectedly strong tax increases and trade restructuring measures has made policymakers more cautious about the future economic direction. The Federal Reserve generally believes that such trade policies will create a "stagflation" effect on the U.S. economy—suppressing growth while pushing up prices. Whether to cut interest rates or maintain the status quo ** will depend on whether slowing growth or rising inflation becomes the main contradiction.

U.S. retail sales and industrial production data for May provide more evidence of economic cooling. Consumer spending in May fell sharply, mainly affected by a decline in gasoline sales and concerns about the future economic outlook.

Retail sales fell 0.9% month-on-month, while a Reuters survey showed that the market expected a 0.7% month-on-month decline in May retail sales.

The Federal Reserve will announce its policy statement and latest economic projections (SEP) at 2 PM Eastern Time on Wednesday (2 AM Beijing Time on Thursday), and Federal Reserve Chairman Jerome Powell will hold a press conference half an hour later.

Focus: The "dot plot" may be more important than the decision itself

Investors and analysts generally believe that the most closely watched aspect of this meeting will be the "dot plot" in the Federal Reserve's Economic Projections Summary (SEP), which reflects the changes in officials' expectations for the interest rate path. This will reveal what changes have occurred in the Federal Reserve's internal views since the March meeting, following Trump's announcement of a new round of tariff measures and the partial postponement of the implementation plan.

The March dot plot indicated a median expectation of two rate cuts of 25 basis points each remaining this year, but the divergence among members has narrowed compared to last December. Some analysts believe that considering controlling inflation has become the current focus of the Federal Reserve, and that Trump's tariff expectations will continue to elevate price pressures, the future dot plot may shift towards a more hawkish directionJP Morgan's Chief U.S. Economist Michael Feroli wrote in a report last Friday: "The evolution of trade policy may have led to a substantial downward revision in the Federal Reserve's expectations for economic growth and inflation." He noted that this "stagflationary adjustment" does not clearly indicate the direction of interest rates, but he expects only one rate cut this year, rather than the previously forecasted two