JP Morgan expects the Federal Reserve to leave interest rates unchanged unanimously next week. May may be the peak of this round of inflation cycles.

Although the latest inflation data in the United States has risen to the highest level in over three years, J.P. Morgan Asset Management believes that this is not enough to prompt the Federal Reserve to take action at its meeting next week, and policymakers are likely to continue to maintain interest rates. David Kelly, Chief Global Strategist at J.P. Morgan Asset Management, said on Wednesday that although inflation remains above the Federal Reserve's target level, the May data is likely close to the peak of this inflation cycle, and price pressures are expected to gradually ease in the coming months. "Essentially, I think the Federal Reserve will decide to do nothing next week with a vote of 12-0." Data released by the U.S. Bureau of Labor Statistics on Wednesday showed that due to the rise in energy prices due to the Middle East situation, the U.S. Consumer Price Index (CPI) rose by 4.2% year-on-year in May, reaching the highest level since early 2023, exceeding the wage growth of U.S. residents. However, the core CPI, which excludes food and energy prices, only rose by 0.2% month-on-month, lower than market expectations, indicating that underlying inflation pressures have not worsened significantly. Kelly believes this is an important reason why the Federal Reserve is still patient and cautious. He said, "Seeing inflation return to the '4% range' is not a pleasant thing, but there is currently no reason to immediately relax monetary policy." He pointed out that although current inflation levels are still over twice the Federal Reserve's long-term target of 2%, core inflation remains relatively mild, and recent signs of a decline in energy prices indicate a lower risk of further significant inflation increases in the future. Kelly specifically mentioned that since the peak on May 20th, U.S. gasoline prices have fallen by about 9%, indicating that the cost pressures previously brought by rising oil prices are easing. "I think May will likely be proven to be the peak of this inflation cycle." The market widely expects the Federal Reserve to maintain interest rates at its meeting on June 16-17. This will also be the first policy meeting under new Federal Reserve Chair Kevin Warsh. According to interest rate futures market pricing, investors have almost completely ruled out the possibility of a rate hike or cut next week. However, the ongoing military actions by the U.S. and Israel against Iran have continued to impact the Middle East situation, leading to increased volatility in the international oil and gas markets, causing a significant shift in expectations for future interest rate trends. Data shows that traders have nearly fully priced in the possibility that the Federal Reserve will raise rates at least once before the end of the year. Before the outbreak of the Iran conflict at the end of February this year, the market generally expected the Fed to cut rates more than twice before the end of the year. The biggest recent change in the market is that the Federal Reserve's focus has shifted from concerns about slowing economic growth to preventing a rebound in inflation. However, Kelly believes that although inflation is still above target levels, it is not sufficient at this stage to force the Federal Reserve to tighten policy further. He said that the Federal Reserve is currently in a relatively favorable position to continue observing changes in inflation and employment data in the coming months and then decide whether to adjust monetary policy. "The Fed can certainly afford to be patient." The market will now focus on the trend of energy prices and future inflation data in the coming months to determine whether May will indeed be the temporary peak of this inflation cycle. If energy prices continue to fall and core inflation remains stable, the Federal Reserve may extend the time for maintaining interest rates unchanged; on the other hand, if inflation accelerates again, it may strengthen market expectations of a rate hike later this year.