Baodexin: It is expected that the Federal Reserve will temporarily defer interest rate cuts in January next year.

PGIM Fixed Income's Chief U.S. Economist Tom Porcelli indicates that after the "hawkish rate cut" in December, the Federal Reserve will pause its rate cuts at the January meeting, waiting for more data to decide whether to resume or terminate the current rate cut cycle. Powell's relatively hawkish stance has caused a decline in the U.S. fixed income market. The market initially expected a 50 basis point rate cut by 2025, but after the press conference, this expectation quickly dropped to 30 basis points. As a result, short-term interest rates fell by 10-15 basis points, while long-term rates fell by 8 basis points, causing the yield curve to flatten significantly. Risk assets experienced significant volatility, with a 3% decline in the stock market and widening spreads in U.S. high yield products. Porcelli explains that for the Federal Reserve, the ending in 2024 is more important than the beginning. On December 18th, the Fed cut rates for the third consecutive time, lowering the federal funds rate target by 25 basis points to 4.35%. As the year comes to a close, the FOMC unexpectedly signaled that due to projections of higher inflation and economic growth in 2025, the pace of rate cuts next year will slow down. Therefore, the Fed implied that they may only cut rates by 50 basis points in 2025, half of what was previously expected in September. However, according to another market perspective, the Fed's terminal rate was raised to 3.1%, 75 basis points higher than the low point in 2021, indicating that the current policy stance is less restrictive than previously anticipated. Additionally, with a dissenting member voting to keep rates unchanged and stubborn inflation exceeding expectations while unemployment slowly rises, Fed Chairman Powell's "data-dependent" approach remains the key to FOMC consensus. Although the Fed's rate cuts indicate a weakening labor market, Porcelli believes that further rate cuts will depend on whether inflation continues to decline. Changes in the Summary of Economic Projections suggest that the Fed may change policies to achieve the dual mandate of inflation and employment. Powell highlighted ongoing challenges in the labor market such as declining hiring and quit rates, as well as slowing labor demand. However, with inflation stagnating in recent months, inflation stickiness has once again become a focus of market attention. As a result, the Fed even raised its forecast for 2025 inflation, increasing the core Personal Consumption Expenditures (PCE) price index from 2.2% to 2.5%, exceeding market expectations. After expectations for two rate cuts in 2025, the median forecast for the federal funds rate will reach 3.9% by the end of next year, up from the previous 3.4% forecast three months ago. Powell's response to the potential impact of tariffs fully reflects the Fed's concerns about inflation potentially remaining above target. While Powell does not completely deny these views, lacking specific data at the moment, he can only avoid discussing the issue.