Despite the latest U.S. inflation data reaching its highest level in more than three years, J.P. Morgan Asset Management (JPM) believes this is still insufficient to prompt the Federal Reserve to take action at next week’s meeting, and policymakers will most likely continue to keep interest rates unchanged. David Kelly, Chief Global Strategist at J.P. Morgan Asset Management, said that although inflation is above the Fed’s target, the May data is likely close to the peak of the current cycle, with price pressures expected to gradually ease in the future. “In essence, the Fed will vote 12–0 next week to do nothing.”
According to data from the U.S. Bureau of Labor Statistics, driven by rising energy prices due to the situation in the Middle East, the Consumer Price Index rose 4.2% year-on-year in May, marking the highest level since early 2023 and exceeding wage growth. However, core CPI, which excludes food and energy, rose only 0.2% month-on-month, below expectations. Kelly pointed out that underlying inflation pressures have not significantly worsened, which is an important reason why the Fed can afford to wait and see. He noted that while it is not pleasant to see inflation back in the “four percent range,” there is currently no reason to immediately tighten monetary policy. Since its peak on May 20, U.S. gasoline prices have fallen by about 9% cumulatively, and the cost pressures previously driven by rising oil prices are now easing.
The market widely expects the Fed to keep interest rates unchanged at its June 16–17 policy meeting, which will be the first meeting under new Chairman Kevin Warsh. Interest rate futures show that investors have almost completely ruled out the possibility of a rate hike or cut next week. However, due to the ongoing impact of the Middle East situation, the market has nearly fully priced in at least one rate hike by the end of the year, whereas as recently as late February, the market had widely expected more than two rate cuts. Kelly believes that although inflation remains above target, the current situation is not enough to force the Fed to further tighten policy, and policymakers can continue to observe changes in inflation and employment data in the coming months. “The Fed can very well remain patient.” Going forward, the market will closely monitor energy price trends and future inflation data to determine whether May marks a cyclical peak for inflation in this cycle.
