The Federal Reserve favors inflation indicators meeting expectations and consumer spending remains resilient. The Fed's short-term optimal solution may be to stay put.

Against the backdrop of escalating conflicts in the Middle East driving up energy prices, U.S. inflation accelerated in April but remained largely in line with expectations, while consumer spending saw a slight increase. Data released on Thursday showed that the U.S. April PCE price index, the inflation indicator favored by the Federal Reserve, rose 3.8% year-over-year, in line with market expectations, higher than the previous month's 3.5%; on a monthly basis, the increase was 0.4%, lower than market expectations of 0.5% and the previous month's 0.7%. Excluding food and energy items, the core PCE price index in April rose 3.3% year-over-year, in line with market expectations, higher than the previous month's 3.2%; the monthly increase was 0.2%, lower than market expectations of 0.3% and the previous month's 0.3%. Meanwhile, U.S. personal spending in April increased by 0.5% compared to the previous month, in line with market expectations but lower than the previous month's 0.9%; real personal consumption expenditures, adjusted for inflation, increased by 0.1% month-on-month, lower than the previous month's 0.2%. In addition, U.S. personal income in April remained flat month-on-month; real disposable income, adjusted for inflation, decreased by 0.5% month-on-month, marking the third consecutive month of decline. The savings rate fell to 2.6%, the lowest level since 2022. This spending data indicates that consumers are becoming more cautious amidst concerns about the cost of living and uneven employment trends. The surge in fuel and other raw material prices resulting from the conflict in the Middle East is impacting the overall economy and pushing consumer confidence to historic lows. Due to the April PCE data largely meeting market expectations and the resilience shown in personal spending data, after the release of these two sets of data, the declines in U.S. stock index futures narrowed and U.S. bond yields fell. Retailers including Walmart Inc. warned that high fuel costs are squeezing profit margins and could soon be reflected in the prices of goods on shelves. Although higher tax refunds in recent months have helped support consumer spending, this effect has been partially offset by rising oil prices - currently, U.S. gasoline prices have risen to their highest level in nearly four years. Walmart Inc. CFO John David Rainey said last week that high-income consumers "maintain confidence in spending in many categories," but low-income consumers are "more budget-conscious, trying to cope with some financial pressures." Amid the release of this inflation data, inflation pressures have exacerbated market concerns, and more and more Federal Reserve officials are signaling a hawkish stance. For example, Federal Reserve Vice Chair Jefferson said that as the impact of tariffs and rising energy costs gradually fades, he expects inflation to cool later this year, but he cautioned that inflation risks remain skewed to the upside. Jefferson reiterated his view that the current policy stance of the central bank is fully capable of responding to any developments. Jefferson said, "I believe that this policy stance makes us fully capable of responding to economic developments based on future data, evolving prospects, and a balance of risks," "I have not made a judgment on the next meeting and look forward to discussing the policies needed to achieve our dual mandate with my colleagues." Chicago Fed President Gulspie intensified his warnings on Thursday, stating that expectations for AI to boost productivity are rising, which could drive up inflation and force the Federal Reserve and other central banks to raise interest rates. Gulspie said, "The more intense the speculation about future productivity, the more likely it is that interest rates will need to be raised to prevent the economy from overheating," "more importantly, short-term supply shocks - whether from oil prices, supply chain disruptions, or other factors - will make the problems worse." Earlier, as a voting member of the Federal Open Market Committee (FOMC) of the Federal Reserve in 2026, Philadelphia Fed President Paulson said she is inclined to keep interest rates unchanged and believes that rate cuts would only be appropriate if progress against inflation continued. Federal Reserve Governor Wall made it clear that the Federal Reserve needs to clearly communicate to the market that in the future rate path, the probabilities of "raising rates" and "cutting rates" are currently equal. Wall warned that if inflation cannot return to a downward trajectory in the short term, he does not rule out the possibility of further rate hikes in the future. Kansas City Fed President Schmidt said that inflation is the biggest risk facing the U.S. economy. Minneapolis Federal Reserve Bank President Kashkari said that the conflict in the Middle East has exacerbated already high inflation, and the Federal Reserve must bring the inflation rate back to its 2% target. Boston Fed President Collins also warned that if inflation pressures persist, the Federal Reserve may need to raise rates again. Meanwhile, the hawkish faction within the Federal Reserve is expanding. The FOMC meeting last month saw the highest level of dissension since 1992up to three officials voted against the policy statement favoring a dovish stance. Meeting minutes show that against the backdrop of rising energy prices from the conflict in the Middle East and renewed inflation pressures, there is a clear shift towards a more hawkish stance within the Federal Reserve. Most officials believe that the current high-rate policy may need to be maintained for a longer period than previously expected, and if inflation remains above the 2% target, further rate hikes may be necessary in the future. From June 16 to 17, newly appointed Federal Reserve Chairman Kevin Wash will preside over his first FOMC interest rate meeting during his term. Against the backdrop of rising inflation, unprecedented internal dissent within the FOMC, and continued pressure from the White House to cut rates, this meeting will not only be Wash's first leadership test but may also become a key turning point in determining the Federal Reserve's policy direction for the next few years. Most Wall Street analysts point out that Wash's first interest rate meeting is likely to directly confront the three intertwined core issues of "inflation, tariff shocks, and economic weakness." The real challenge Wash faces is how to carefully word the policy statementshowing hawkish determination to fight inflation to appease the bond market while maintaining a dovish empathy for weak employment, delicately balancing the Federal Reserve's policy scale in the eye of the storm. Based on various analyses, the most likely outcome of the June FOMC meeting is to keep interest rates unchanged at 3.50%-3.75%, but the wording of the policy statement may shift from a dovish bias to neutral. CME Group Inc. Class A's "Fed Watch" tool shows that the market believes there is over a 90% probability that the Federal Reserve will keep interest rates unchanged in June and July.