The Federal Reserve Maintains Interest Rates: Global Financial Turbulence under a Hawkish Stance

On May 13 local time, the Federal Reserve's monetary policy meeting concluded with the federal funds rate being kept at the 4.25%-4.5% range for the third consecutive time. This decision met market expectations, but the hawkish signals conveyed by Fed Chair Jerome Powell afterward sent shockwaves through global financial markets.

Looking back at the backdrop of this interest rate decision, U.S. economic data presented a complex picture. While the labor market remained robust, with the unemployment rate at historic lows and strong corporate hiring demand, inflation data consistently failed to ease as expected. Core inflation indicators stayed persistently above the Fed's 2% target. Fluctuations in prices of essential goods like food and energy have increased the cost of living for American households. Moreover, although the banking crisis has been temporarily contained, latent financial risks remain, and the tightening of the credit market has somewhat constrained economic expansion. Under these circumstances, the Fed chose to maintain the status quo of interest rates, observing economic data with caution in an attempt to strike a balance between controlling inflation and stabilizing economic growth.

In its policy statement, the Fed emphasized that inflationary pressures persist and that, despite the resilience of economic growth, many uncertainties loom. Powell was forthright during the press conference, repeatedly stating that "it will take time for inflation to fall back to the target level" and clearly indicating that "interest rates will not be cut prematurely." This hawkish stance sent a strong signal to the market. He pointed out that although some inflation indicators have improved recently, there is still a long way to go to achieve the Fed's goals. Future adjustments to monetary policy will be highly data-dependent, especially on the sustained decline of inflation data and the stability of the job market.

The Fed's decision and hawkish stance have had a significant impact on global financial markets. In the foreign exchange market, the U.S. dollar index surged, breaking through key resistance levels, while other major currencies came under pressure. The euro sharply depreciated against the dollar, and the Japanese yen, British pound, and other currencies also faced devaluation pressures. For emerging market currencies, the situation worsened. As the U.S. dollar is the world's primary reserve currency, its appreciation led to capital flowing back to the United States, exacerbating capital outflows from emerging markets and increasing currency devaluation pressures. For instance, the Argentine peso and Turkish lira experienced significant fluctuations against the U.S. dollar, posing huge challenges to these countries' economic stability and increasing their external debt repayment costs.

In terms of risky assets, both the stock and bond markets were suppressed. The three major U.S. stock indexes all declined, with the technology sector being hit particularly hard. Expectations of high interest rates put pressure on the valuation of technology companies, and investors became more cautious about future earnings growth. Meanwhile, bond market yields fluctuated significantly, with the yield on 10-year U.S. Treasury bonds rising sharply and bond prices falling. Stock markets in other parts of the world were also affected. Major stock markets in Europe and Asia declined, and investor risk aversion increased.

Regarding the direction of monetary policy in 2025, market expectations have shifted dramatically due to the Fed's hawkish stance. Previously, the market widely expected the Fed to start a rate-cutting cycle in the second half of the year to address potential economic slowdowns. However, now the window for rate cuts has been postponed to the fourth quarter, and uncertainty has increased substantially. This change in expectations has forced global financial institutions and investors to readjust their asset allocation strategies. For businesses, the high-interest-rate environment has increased financing costs and curbed investment expansion plans. For ordinary investors, both the returns on their financial products and investment risks need to be reevaluated.

From the perspective of the global economic landscape, the Fed's hawkish stance has exacerbated the unevenness and uncertainty of the global economic recovery. Emerging economies face multiple pressures, including capital outflows, currency devaluation, and rising inflation, which may slow down their economic recovery. There are also differences among developed economies. The divergence in monetary policies between regions such as Europe, Japan, and the United States has widened, posing new challenges to global monetary policy coordination. In this context, countries need to flexibly adjust their macroeconomic policies according to their own economic situations, strengthen international policy communication and coordination, and jointly address the risks and challenges facing the global economy.