U.S. may expand Nvidia and AMD’s 15% China chips deal to other companies
On Wednesday, the Federal Open Market Committee (FOMC) released minutes from their May 6-7 meeting, which revealed a consensus to maintain the current hold on policy changes. Analysts at JPMorgan noted the committee’s cautious approach in the face of rising tariffs and economic uncertainty. This cautious stance is reflected in the Treasury bond market, where the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) is currently trading near its 52-week low at $85.36, offering investors a substantial 4.59% dividend yield. InvestingPro data reveals additional insights about the Treasury market’s response to monetary policy, with multiple key metrics and analysis available to subscribers.
The minutes indicated that the FOMC participants were surprised by the magnitude and breadth of tariff increases announced after the Liberation Day, which occurred between the March and May FOMC meetings. This has led to heightened uncertainty about the economic outlook, prompting a wait-and-see attitude among committee members. Despite this, the FOMC acknowledged that with inflation slightly above target and a strong labor market, they are well positioned to wait for more clarity before making any policy adjustments.
The discussion during the meeting largely focused on how tariffs and the associated uncertainty might affect inflation and growth. A key takeaway from business contacts was their intention to pass on tariff-related costs to consumers and, in some instances, to halt or reduce hiring due to the elevated uncertainty. The minutes also suggested that inflation is expected to rise due to higher tariffs, while there is a risk of labor market weakening in the upcoming months.
The FOMC did not express a definitive stance on the timing of these risks, mirroring Chairman Powell’s noncommittal response during the post-meeting press conference. Some FOMC participants noted that businesses might be more inclined to pass on tariff price increases, considering the recent uptick in short-term inflation expectations and the high inflation experienced post-COVID. This backdrop could make the committee hesitant to cut rates in response to early signs of labor market weakness.
While the language regarding longer-term inflation expectations was slightly more hawkish than at the last meeting, most participants still viewed these expectations as well anchored. Some members, however, pointed out the possibility of persistent inflation effects due to pass-through to intermediate goods prices or supply chain disruptions.
Despite concerns over soft data measures and a weak first quarter GDP print, which some attributed to measurement issues, the FOMC described the overall economic growth as solid and the labor market as balanced. The committee is prepared to view any actual weakness as a potential future issue rather than a current reality, suggesting that they may also discount a potential surge in GDP if it coincides with a significant drop in imports. This measured approach aligns with the defensive characteristics of long-term Treasuries, as evidenced by TLT’s low beta of 0.49 and its modest year-to-date performance decline of 0.45%. For comprehensive analysis of market trends and their impact on Treasury bonds, InvestingPro subscribers have access to detailed financial metrics, expert insights, and real-time market indicators.
In other recent news, Moody’s has downgraded the United States sovereign credit rating, following similar actions by S&P in 2011 and Fitch in 2023. Analysts from JPMorgan suggest that this downgrade is unlikely to have a significant impact on financial markets due to historical precedents and current market structures. Bond index providers had already reclassified U.S. government-related bonds into the AA category, and the share of AAA-rated bonds remains stable. Meanwhile, Citi analysts note that the downgrade should not significantly affect foreign demand for U.S. Treasuries, despite potential increases in 30-year Treasury yields. They highlight that foreign investors purchased about $138 billion in long-term U.S. Treasuries in March, indicating stable demand.
Additionally, Federal Reserve officials are reconsidering their monetary policy approach in light of recent inflation experiences and potential future supply shocks. Fed Chair Jerome Powell mentioned that the current strategy, adopted in 2020, is under review to better address these challenges. Fed Governor Adriana Kugler expressed concerns about assessing the economy’s strength due to changing trade policies, which have introduced uncertainty in predicting future growth and inflation. The recent temporary halt on U.S.-China tariffs has led to expectations of fewer interest rate cuts by the Federal Reserve, as reduced tariffs are seen as a potential growth stimulant. Despite the uncertainty, the Fed plans to maintain the current interest rate range until the economic outlook becomes clearer.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.