At 2:00 am, the Federal Reserve shattered the world's illusions with its own hands

Source: Wall Street Intelligence Circle

This is not a simple "no rate cut" decision, but a "defensive retreat" targeting market sentiment.

At 2:00 am (UTC+8), the Federal Reserve announced that interest rates would remain unchanged. Although the market was prepared, there was still an excessive reaction.

First, at 2:00 (UTC+8), the first wave of announcements came with the policy statement:

1. Wording adjustments in the statement:

The description of the unemployment rate changed. Previously, it stated that the "unemployment rate has changed little in recent months," but now it's been revised to "the unemployment rate has shown some signs of stability," indicating that the Federal Reserve is not worried about a deteriorating jobs market.

At the same time, a new sentence was added: developments in the Middle East still pose uncertainties for the U.S. economy.

2. Dissenting votes reduced from two to one. Governor Milan still advocates for rate cuts, while Waller, who previously supported rate cuts, now backs keeping rates unchanged (Waller has "switched sides," and an internal hawkish consensus is forming).

3. The dot plot shows that most officials still expect one rate cut this year and another in 2027, but the exact timing remains unclear. Compared to December last year, the number of officials who support no rate cuts this year has increased. The market had previously bet on at least two rate cuts this year, or even a third, but now expectations for 2026 have narrowed to at most one cut.

4. Inflation forecast raised, with the median forecast for core PCE inflation in 2026 raised to 2.7% from 2.5% (price pressures remain higher than the 2% target).

Then, at 2:30 (UTC+8), the second wave came with Powell's press conference:

5. Powell stated that the impact of the U.S.-Iran war is still unclear, and the Fed’s progress in bringing down inflation is "not as significant as previously hoped." Upon saying this, the market immediately turned pessimistic and stocks fell to their daily lows. Powell also said some of the oil price shocks will feed through to core inflation, and if the Fed does not see progress on inflation, there will be no rate cuts.

The market’s biggest shock was that, during the downturn, the Fed did not choose to comfort the market; Powell himself killed the "Fed put"—crushing all market fantasies. Just a few hours before the Fed announcement, the market had already experienced a dip. After the Fed policy announcement, U.S. stocks and gold accelerated their declines. The real shock this time is not about being "more hawkish," but rather "abandoning the safety net."

After listening to Powell's press conference, traders lamented "they are at their wits' end, this is policy purgatory."

We have now entered a very dangerous situation, as major markets have reached extreme levels:

- Gold and U.S. stocks have fallen below their lowest points since the Iran war, with gold prices repeatedly breaking through $5,000 and $4,900, closing in on the $4,800 level.

- Meanwhile, the U.S. dollar and crude oil are rising together again. The U.S. Dollar Index has climbed back above 100 during trading, and Brent crude has reached $110.

What the Federal Reserve wants to communicate is: if the market falls, it's not my concern—only inflation matters.