The 'Go Do' That Powell Is Eagerly Waiting for to Combat Inflation, But It May Not Be the Only One.

The hawkishness of the SEP is the largest expected difference, with the core PCE expected to be revised upward to 2.5% by 2025, while the full-year interest rate cut expectation narrows to 50bp. In addition to the still strong internal dynamics of the US, the combination of a "strong present, strong expectations" perspective from the Fed makes the so-called hawkish interest rate cut in December resemble a mirror image of the significant interest rate cut in September: lacking consistency. The quest for inflation is the "Gordian knot" that Powell has been eagerly awaiting, but it may not be the only one. With employment showing no signs of an upward turning point, fewer Fed officials believe that future US economy faces downward risks. While the market still believes that "tomorrow will be better", these inconsistencies need to be watched out for. The Fed lowered interest rates by 25bp as scheduled, but a total of four officials supported keeping rates unchanged, while the majority believed that the inflation risk in the US in 2025 is biased towards an increase. The hawkishness of the SEP is the largest expected difference, with the core PCE expected to be revised upward to 2.5% by 2025, and the full-year interest rate cut expectation narrowing to 50bp. Economic growth is strong, the restrictiveness of interest rates is questionable, and Tianfeng Macro believes that the need for consecutive interest rate cuts is limited. In this context, the quest for inflation is like the "Gordian knot" that Powell has been eagerly awaiting, and all he has done is to repeat previous actions: cut interest rates, then wait, yet still not seeing the shadow of the "Gordian knot". Powell has been constantly changing reference points over the past year to prove the correctness of his monetary policy. Especially in 2024H2, the process of US inflation stagnated, but two hurricanes allowed him to easily switch, raising concerns about economic growth (rising unemployment rate), resulting in a total interest rate cut of 100bp for the year. All of this comes at a cost, as the trend of inflation has not actually dispelled the fundamental question in the market: "When will the 'Gordian knot' come?". With the Fed's risk balance clearly returning to being "anti-inflation" (Powell personally admitted that the economic growth in 2024H2 is significantly higher than expected), the December FOMC meeting seems more like a sign of the end of the "first act - consecutive interest rate cuts", entering into the "second act - pauses and stops". The upward revision of the core PCE to 2.5% in 2025 in the December SEP reflects less, not more, confidence from the Fed. Naturally, the sharp decline in US stocks and the overall increase in US bond yields after the interest rate decision are solid pricing for the possibility of a delayed appearance of the "Gordian knot". Furthermore, if mainstream interest rate cut expectations narrow down to 2-3 times, considering the uncertainty of Trump, there is reason to doubt whether this is the existence of "(the final) last interest rate cut for a while". All of this may become more chaotic, not clearer, with Trump taking office. As the labor market does not weaken rapidly, retail sales continue to grow, and consumer confidence returns to a high point after the election, the change in the inflation process becomes increasingly important, which is why the market begins to doubt. Powell himself believes that while interest rates still have some restrictiveness, the restrictiveness has significantly decreased. However, when asked about the so-called neutral interest rate, he appears ambiguous. In any case, Tianfeng Macro believes that the December FOMC meeting has basically "pierced through" the wafer-thin window of "limited restrictiveness of interest rates", and the neutral interest rate is no longer a reason for consecutive interest rate cuts. The continuous upward revision by the Fed of long-term interest rates reflects its uncertainty about the neutral interest rate. The quest for inflation is the "Gordian knot" that Powell has been eagerly awaiting, but it may not be the only one. With Trump beginning to intervene in bipartisan spending bills and Musk deepening reforms in the US system, the pressure they bring to the US economy may become unexpected. With employment still not showing signs of an upward turning point, fewer Fed officials believe that the future US economy faces downward risks. While the market still believes that "tomorrow will be better", these inconsistencies need to be watched out for. Two interest rate cuts in 2025 are just a sum of probabilities, it is hard to exactly fulfill this magnitude; it could be either fewer or more. However, Tianfeng Macro believes that this does not depend on Powell, but on Trump; in 2025, there is no monetary policy, only monetary countermeasures. Risk warning: US interest rate cuts exceed expectations, the pace of Trump's policy implementation exceeds expectations, Trump's trade policy becomes more aggressive, and nonlinear changes occur in US private sector debt. This article is sourced from the macro research report released by Tianfeng, authored by the Song Xuetao team; GMTEight editor: Liu Xuan.