Fed Officials Speak Out to Calm Markets, but Markets Seem Unmoved?

TradingKey - Following the latest policy meeting, several Federal Reserve officials have issued a flurry of signals to "stabilize expectations," yet market reactions have diverged significantly. Despite the policy emphasis on stability, financial markets have voted with their feet—U.S. stocks weakened, yields rose, and expectations for rate cuts have been continuously pushed back.

From a policy perspective, the Fed maintained the interest rate range at this meeting and repeatedly emphasized that inflation remains "above target," requiring more data to support a policy pivot. Meanwhile, officials generally sought to downplay the energy shock stemming from the Middle East conflict after the meeting, suggesting its impact on core inflation may be limited and that policy will remain centered on a "data-dependent" framework.

Fed Governor Christopher Waller stated that the marginal softening of the labor market, combined with rising uncertainty in the Middle East, necessitates a more cautious approach to the current policy path. He emphasized that this does not mean the Fed will remain on hold for the rest of the year; rather, once the data becomes clearer, he would support restarting the rate-cutting process later this year if the job market continues to cool and external risks remain manageable.

Another Fed Governor, Michelle Bowman, signaled more explicit easing expectations. In an interview, she stated that she expects the Fed to potentially implement three rate cuts this year, bringing the federal funds rate below the "neutral rate" defined by the FOMC—shifting from a restrictive range back to a level that neither stimulates nor inhibits economic growth.

However, the issue is that the market's focus has shifted to "whether there will be any rate cuts at all."

On one hand, the situation in the Middle East has driven up oil prices, directly altering the inflation trajectory. Brent crude once hovered above $100 per barrel, forcing the market to re-price the risk of "energy-driven reflation." Against this backdrop, traders swiftly scaled back bets on rate cuts in 2026 and even began discussing the possibility of renewed rate hikes.

On the other hand, economic data itself is undermining the certainty of policy easing. While the labor market remains relatively stable, inflationary stickiness persists, leaving the Fed caught in a classic "contradictory structure."

The Fed's "soothing communication" is losing its marginal effectiveness.

Historical experience suggests that the effectiveness of forward guidance diminishes significantly when the market faces high uncertainty regarding the policy path. During this meeting, although most officials emphasized that the "oil price shock may be transitory" and maintained a dovish tone, market anxiety stems from whether the Fed would be forced to shift its stance if the shock persists.

When the market ceases to fully believe the path guidance provided by Fed officials, asset price volatility will be driven more by uncertainty than by certain expectations. In such an environment, the correlation between interest rates, the U.S. dollar, and risky assets will become more volatile, making the market more prone to repeated cycles of "over-pricing and re-correction."

The Fed's attempts to reassure the market are actually consistent with the views of some institutions that believe the market has overreacted; Citigroup still expects room for rate cuts this year.

Citigroup stated that the Fed will not be forced back onto a rate-hike path by energy prices; a more likely scenario is "holding steady followed by faster and deeper cuts." Citigroup maintains its view of "total rate cuts of 75 bps this year," specifically staying on hold in April, followed by 25-basis-point cuts in June, July, and September.

In the short term, as long as oil prices remain high and inflation expectations do not significantly recede, the Fed's "verbal reassurance" will struggle to reverse market pricing logic. What can truly shift the direction of market expectations is the data itself—specifically, whether future inflation data is substantially impacted by energy costs. If such an impact is confirmed, it may lead the market to further erode expectations for future easing policies.