2025 Chief Economist Roundtable: Discussing the Federal Reserve Monetary Policy, and Looking Forward to the Global Capital Markets

On January 4, 2025, the "2025 China Chief Economist Forum Annual Meeting" was held. During the roundtable discussion segment, the discussion revolved around the topic of the Federal Reserve's monetary policy and the global capital markets. Guests including Cheng Shi, Chief Economist of ICBC International, Li Zongguang, Director of Chengtong Securities Research Institute, Zhao Hongmei, Director of Fog Capital Investment Research, and Zhao Wenli, Chief Strategist and Research Director of Jianguo International, shared their views. Li Zongguang believes that it will be difficult for the US economy to achieve a soft landing in the short term, and the overheated state may persist longer than expected. Cheng Shi pointed out the high risk of re-inflation in the US, and inflation is difficult to decrease. With Trump taking office, there will be inflation upward pressure from multiple aspects. Cheng Shi expects the Fed to cut interest rates by 50-75 basis points in 2025, with a path of rapid adjustment followed by a slower pace. Zhao Wenli mentioned the possibility of policy expectation adjustments, and potential changes in crisis mode. In terms of the US dollar trend, Zhao Hongmei predicts that the US dollar will start high and rise in 2025, decrease in the middle of the year, and rise towards the end of the year, with most major currencies being strong in the first half of the year and weakening in the second half. Li Zongguang believes that if inflation rises, the Fed may raise interest rates, leading to a significant appreciation of the US dollar. In terms of investment advice, Zhao Hongmei suggested that AI applications in 2025 will be hot topics, focusing on US stocks related to defense and cryptocurrencies, and optimistic about sectors such as science and technology innovation in A shares. Li Zongguang mentioned that gold will be volatile in the first half of the year, but remains optimistic in the long term, and US stocks may experience a pullback due to interest rate changes. Zhao Wenli pointed out opportunities for expectation differences in Trump's trade, US-China relations, and China's market investments. Cheng Shi suggested being actively cautious in investments; Li Zongguang emphasized maintaining optimism for the Chinese economy and capital markets; Zhao Hongmei proposed over-allocating different assets in stages; Zhao Wenli reminded to utilize expectation differences and avoid crowded trades. Transcript of the meeting: "Leaders and guests, good afternoon! Entering the first roundtable forum this afternoon, we will continue to discuss the topic of the Federal Reserve's monetary policy and the outlook for the global capital markets this year. Just now, the two chief economists have made some systematic explanations on this issue, and I believe everyone has heard their views. In the roundtable segment, I believe we may expect to see some collision of ideas among our guests, as everyone's views on the year ahead will definitely differ in some aspects. Sharing these opinions here will perhaps provide a more engaging discussion for the audience. Before we delve into the topic of investment advice, we first need to return to the US and the Federal Reserve, as the actions of the Federal Reserve will have various impacts on the pricing of global assets in the entire financial market. Last year, since September when the Federal Reserve entered a rate cut cycle, many asset prices have seen increases. Therefore, the judgment of the Federal Reserve is a crucial point, which in turn depends on the assessment of the US economy. So the first topic for today is to see how the US economy is perceived this year. The first question goes to Chief Li Zongguang, how do you see the US economy this year? Because last year, we initially had low expectations for the US economy, but its performance actually exceeded expectations. At this point, it seems that we are more positive about the US economy overall. Will there be different circumstances this year? It is indeed difficult to predict. Li Zongguang: At the beginning of the year, the market expected the US economy to grow by 1.4%, not from Chinese institutions, but from global institutions including American ones, but in reality, looking back, the US economy grew by 2.9% this year. In fact, since 2021, every year people have been asking when the US economy will experience a soft landing, because the US economy is currently in an overheated state. We are not saying that the higher the economic growth, the better, it is also suffering from the pains of overheating. From a bottom-up perspective, we can see recent data from the US, with a wave of declines at the end of each month followed by acceleration again, like the PMI has been increasing for two consecutive months, and US retail sales have increased by 0.7% month-on-month and 3.8% year-on-year in the most recent month, also showing three consecutive months of growth; the real estate market has also been performing very well in recent months. So from this perspective, it may take some time for the US economy to rapidly cool down in the short term in order to achieve a soft landing. I once read a study that mentioned that the US labor market has been improving over the past few years. With the current state, the labor market in the US is much higher than before, so from this perspective, the overheated state of the US economy may persist longer than expected, in my opinion. Xiong Yi: Thank you, Chief Li. Chief Li just mentioned that the US labor market might still be relatively strong, and a strong labor market often creates upward pressure on prices, which is also an important aspect that affects the decision-making of the Federal Reserve. I remember that last year, not only us but even the Chairman of the Federal Reserve had a meeting in August where he said that we believe the issue of inflation in the US has been resolved, but recently the market has started to worry about whether there might be a risk of re-inflation in the US economy. I would like to ask our Chief Cheng, how do you view the risk of re-inflation in the US economy? Cheng Shi: In fact, the market has already started pricing in the risk of re-inflation in the US. I think the risk of re-inflation in the US can be seen from two main aspects: Firstly, the range in which inflation currently stands makes it difficult to decrease in the next step, as its downward movement is limited and challenging. There are many possible factors that could drive it. The second dimension is that Trump's second term is about to begin. Although it has not officially started yet, it has already had a systematic impact on inflation expectations, as inflation expectations are self-fulfilling. Therefore, substantial inflation upward pressure will be formed. Why will Trump 2.0 boost inflation expectations? Mainly due to four aspects: on one hand, Trump's labor policies will further lead to changes in the labor market, which you just mentioned its current status might lead to... (Translation ends here. If you need the rest translated, please submit it as a new task.)This will create even greater pressure for wage increases; on the other hand, Trump's policy of imposing taxes will raise the cost of imports, leading to upward pressure on prices. Thirdly, as Chief Yang mentioned earlier, Trump's long-term policies will undoubtedly increase the pressure of the United States' financial debt, raising concerns about the monetization of debt and the inflationary pressure that this brings. Fourthly, we all know that Trump has consistently made unfriendly remarks towards Powell, which has actually caused substantial harm to the independence of US monetary policy. The loss or weakening of monetary policy independence can also pressure inflation to rise. In conclusion, the second dimension is that Trump's upcoming 2.0 era will boost expectations for inflation in the United States. Thank you.Xiong Yi: I heard everyone's opinions and I believe that the momentum of the US economy may continue for some time, while inflationary pressures may persist. Does anyone else have any additional thoughts or different perspectives on this topic? Zhao Hongmei: I think the uncertainty for next year, 2025, is indeed very high. The focus is still on the Federal Reserve's policy and the game with the Trump administration. Xiong Yi: Yes, indeed, Trump is definitely the biggest variable this year. Later on, we will have a dedicated segment to discuss the impact of Trump's policies on China. Of course, it not only affects China, but also the entire US economy. Let's continue the discussion we just had. Since we now have a view that the US economy and inflation may remain at high levels, how will this affect the Federal Reserve's policy? Although the Fed cut rates by 100 basis points last year, the policy rate is still relatively high, and just mentioned earlier, the recent rate cut was seen as a hawkish move. At this point, with the imminent change in the White House, how do you view the Fed's actions this year? Chief Cheng, can you provide some insight? Cheng Shi: Actually, before and after Trump's election victory, many people, including myself, have adjusted their expectations for the Fed's rate cuts in 2025. My previous expectation was a further 100 basis points cut in 2025, but now I have adjusted it to a cut of 50-75 basis points. I believe there may be further adjustments in the future, depending on the specific policy implementation after he takes office. The monetary policy path in the US in 2025 will likely be a gradual process, which will have a significant structural impact on the entire financial market. Xiong Yi: You mentioned 50-75 basis points, a gradual process, so you mean we may see a few rate cuts first, followed by a pause? Cheng Shi: Yes, it will gradually, if inflation continues to rise. Xiong Yi: Understood. Moving on to Director Zhao Wenli, from a strategic perspective, how do you view the Fed's policy path this year? Zhao Wenli: From a strategic perspective, we pay close attention to expectations. From the last rate hike cycle to the transition to a rate cut cycle, we have seen many adjustments in market expectations for the Fed's monetary policy. These adjustments are related to expectations. In the past few years, the consensus expectations for the Fed's monetary policy for the next year have all been wrong. This time, we can't say it will be the same, but there is still a high probability of expectation adjustments. I agree with Chief Yang's analysis earlier that, based on rational judgment, the Fed may have conditions to cut rates once or twice in the first half of next year, but then they may start to observe more, and future policy disruptions by Trump may be significant. So, in the second half of the year, if inflation does not decrease and even starts to rise again, the Fed's monetary policy may undergo further changes. However, we cannot ignore the possibility that each rate cut cycle in the US is not a standard, gentle, and idealized process. Many times, a crisis mode may suddenly occur. So, we cannot predict whether there will definitely be a black swan event next year, but typically in the late stages of such a high-interest-rate economic and monetary cycle, similar situations are prone to occur. Therefore, I also agree with the market's consensus baseline judgment, but I still remain cautious. It is highly likely that there will be an expectation adjustment for next year, but the reasons and specific timing we still need to observe further. Xiong Yi: Indeed, it seems that market predictions for the Fed are almost always wrong at any given point in time. At least at this point, we believe that even if the Fed does have room for rate cuts this year, it may not be significant. Our own economists even suggest that there may not be any rate cuts this year, and the next rate cut may not be until the first quarter of 2026. With Trump coming into office soon and likely implementing fiscal stimulus, possibly imposing tariffs or even deporting illegal immigrants, all policies could lead to higher inflation. In such a scenario, the Fed's cautious approach should be a reasonable one. Of course, how long this caution can be maintained will depend on how the US economy actually performs. So, we will need to continuously adjust our views on them in the future, but at least at this point, I think the Fed's hawkish assessment is still a market consensus. With this background, the next important question arises: what will happen to the US dollar? In the past year, the dollar has been very strong, with the euro-dollar rate recently dropping to 1.02, heading towards 1. Looking at the entire dollar index, it may have appreciated by 5-6% last year, but in the last 3 months of the year, the dollar index rose by 8%. When a very strong dollar appears, it often has a significant impact on the entire financial market, causing funds to flow into dollar-denominated assets and flee from non-dollar assets. This is a natural reaction, especially in a high dollar interest rate environment, funds often flow this way. How do we view the US dollar trend this year? Let's first discuss with Director Zhao Hongmei of Wusong Capital. Zhao Hongmei: Especially on December 18th, 2024, when the Fed turned hawkish, the US dollar index surged well beyond market expectations. In 2025, foreign exchange market risks and uncertainties have increased, something every investor needs to face. We believe that the two most important variables in the foreign exchange market in 2025 are interest rates and risk appetite, with the most significant influence being the Fed's monetary policy. Looking at the entire US dollar market, we believe the dollar may still - containing incomplete text.It may show a trend of high opening and high growth throughout the year, with some fluctuations in the middle, followed by a decline in the middle of the year, and then a high at the end of the year. This is because, as Chief Economist Cheng mentioned earlier, it is predicted that there may be further interest rate cuts starting in the second quarter, which could cause the value of the dollar to decrease further than it is now. However, as the easing gradually begins to support employment and inflation, we believe that Trump's policies may raise the value of the dollar. So, in 2025, we do not expect the dollar index to fall below 100, as it will remain very strong. In If we look at the euro, the performance of the European economy in 2024 is very average, and it may continue to be relatively poor in 2025. We also see that the European Central Bank has cut interest rates earlier than the Federal Reserve, and the pressure of Trump's tariffs has brought more uncertainty to Europe. Therefore, I think that in the first half of the year, the euro may still be relatively weak compared to the dollar, and with Trump's policies suppressing the euro economy in the second half of the year, it may face further declines and possibly return to a range of 1.01 to 1.02. Actually, I think the weakening of the yen in 2024 has exceeded the expectations of many investors, mainly due to carry trades. Therefore, in 2025, we believe that the yen may see a moderate rebound because the Bank of Japan is also a policy-sensitive central bank and is unlikely to raise interest rates beyond market expectations. So, I think the yen may be relatively weak, and by the end of the year, the exchange rate may return to around 145. What we are most concerned about is the exchange rate of the Chinese yuan. I think the recent rise of the RMB to 7.30, especially when the CNY market unexpectedly broke through 7.3 in the past two years, may indicate that the exchange rate of the RMB will continue to increase this year. With Trump taking office on January 20th, his tariff policy directly affects the volatility of the RMB exchange rate, so the volatility this year has indeed increased, causing difficulties for many companies. But I think the RMB may show a pattern of depreciation followed by appreciation throughout the year. Xiong Yi: Thank you, Mr. Zhao. From what I understand, you believe that the dollar will remain strong relative to most major currencies in the first half of the year, but there may be a possibility of its strength diminishing in the second half of the year, whether it's against the euro, yen, or yuan. Mr. Li, how do you see this issue? Li Zongguang: Just now, all the experts talked about the monetary policy of the Federal Reserve. In fact, in reality, the United States is experiencing rapid inflation this year. One aspect is core commodities like used cars, which had high prices because the US government distributed money recklessly during the pandemic in 2021, causing everyone to buy cars at high prices, which are now falling. Another aspect is that this year, international commodity prices are falling. If we look at inflation in the US service industry or in real estate, it is still very high. So, even without Trump's so-called tariff immigration policies, the US CPI started to rise from June this year, though perhaps in a more moderate way. So, in this situation, I think the Fed's interest rate cuts are more of an opportunistic move because they had raised rates very high before and were in a very uncomfortable position. If another crisis were to come, and they had to raise rates again, they might not have the space to do so. Therefore, I see this as a kind of opportunistic move. If we look at it from the perspective of economic demand, such high inflation should not lead to such quick rate cuts. So, along with Trump taking office, there are some predictable signs, such as tariffs and immigration, which are its core signs. Of course, when some reporters asked him if he was worried that this would cause inflation in the future, he said he wasn't worried, as these were things the Fed was considering. From this perspective, even without Trump's policies, inflation was already rising internally. So, if these marginal factors are added, inflation could reach 4-5%. In this case, the Fed might be forced to raise rates, so I am concerned that there may be two rate cuts in 2025. After the cuts, there may or may not be rapid rate hikes again. In that scenario, the dollar may significantly appreciate. It could go beyond what we anticipate, possibly reaching 120 or 130. This situation occurred in the 1980s, when Volcker raised rates and the Plaza Accord not only affected Japan. Japan is often seen as a victim of conspiracy theories, but in reality, the dollar appreciated by 80% in the 1980s, and other countries couldn't bear the drain on their resources. Eventually, a few countries sat down to discuss this process. Currently, the US and G7 countries, as developed nations, are performing much better in terms of real interest rates and potential growth than other countries. If this continues, coupled with Trump's various investments since taking office, because many capitalists are very optimistic about investments, it may lead to a stronger dollar compared to others. So, I think the biggest risk next year is actually a strong dollar, possibly stronger than what most people expect. Thank you. Xiong Yi: Thank you, Mr. Li. It's very interesting. Just now we heard what may be the most hawkish view so far, suggesting that the Federal Reserve may raise interest rates this year and that the dollar index may appreciate. The degree of appreciation is unknown, but it could possibly reach 120 to 130. If we do see this happen by the end of the year, remember that Mr. Li was the first to bring up this viewpoint. If it indeed occurs, it will certainly have a significant impact on the financial markets this year. Now, moving on to the next segment, in light of the discussion on the Federal Reserve we just had, do any of our guests have any additional comments or have any comments on the points raised earlier? Alright, let's move on to the next and more important question -- after discussing so much about the US and Federal Reserve policies, I believe this is only a background, and what is truly important is the need for judgments on these policies and the economy to guide us on how to invest this year. Although there were many fluctuations in the global environment last year in terms of both political and economic factors, overall, last year was a relatively good year for the entire capital market. Most risk assets saw an increase in value last year, with most stock markets experiencing gains. Additionally, safe-haven assets like gold and silver also saw significant increases last year. Moreover, even assets like Bitcoin saw substantial increases. One aspect that might not have received much attention is credit assets - risk premiums narrowed last year, leading to a bull market in corporate bonds globally. Therefore, last year was good for asset performance overall. Lastly, the biggest hot topic last year was definitely AI, with AI-related assets performing the best. Against this background, the direction of investment this year is crucial.The biggest hot topic of the year without a doubt.We need to continue our efforts. Before he officially takes office, both China and the US have some retaliatory measures, and so on. I believe that the Trump 2.0 era and the new domestic and international environment we are in now may be completely different from when he first took office in 2016. So both sides need to calm down and rethink: which actions are necessary, which can be said but not necessarily acted upon, and even those that are not mentioned on the table but can be discussed behind closed doors. I believe that China and the US have not yet established a very clear communication channel, but once there is a signal for negotiations or chip trading, it will be very beneficial for the market. Because originally, people thought that there was nothing good to talk about between China and the US, and the possibility of a major conflict was relatively high, so expectations were already very pessimistic. Once the process of exchanging chips between China and the US appears, I think it is a very good trading opportunity.Another aspect is that in the past few years, shorting emerging markets while going long on the US has been a popular trading strategy, especially shorting the Greater China market. This year, I feel that the profitability of this trading strategy may not be as great. If one overestimates that the US will significantly outperform and China will significantly underperform, it could lead to errors. From recent changes in fund flows, we can see that although there have been significant inflows and outflows in the Chinese market in September and October, some funds have remained stagnant, which is a very positive change. In addition, in the past year, Japan, India, and other emerging markets have had a strong capital suction effect on the Chinese market. During that period, certain stories and logics could be detrimental to the Chinese market. However, after policy adjustments, we have found that foreign investors are showing a significant improvement in their risk-return assessment of the Chinese market. Currently, other neighboring emerging markets like India and South Korea are facing their own problems, leading to a temporary outflow of funds. Therefore, if our policies can effectively address the deflation risks, issues related to expanding domestic demand and structural adjustments, I believe this will provide foreign investors with a more favorable growth environment and risk-return, making the Chinese market more attractive than in previous years. Yi Xiong: Thank you, we just discussed a very critical investment strategy issue. Guests can further expand, like Mr. Zhao, who has given us some good ideas. The readjustment of Trump's policies, including the possible improvement in US-China relations, may not deteriorate as quickly as expected. The views on the Chinese market may undergo a transformation. I would like to pass the mic to Mr. Cheng to share his thoughts on areas where unexpected expectations may arise in the market this year. Cheng Shi: I think unexpected expectations are a very good topic because the world does not always play by the rules, and the future always arrives in unexpected ways. Unexpected expectations are always present, and I think there are three important areas in which we should focus or consider: First, the United States. The long-term existence of unexpected expectations in the US is a common phenomenon, as mentioned earlier by everyone. A year ago, everyone present systematically misjudged the state of the US economy this year. I will share a specific number with you to show how far off the mark these people were. In the past year, our expectations for the US economic growth rate in 2024 have been raised by nearly 1.3 percentage points, with the US economy expected to grow only around 2.8-2.9 percent. This is a significant change, indicating that unexpected expectations have been widespread in the past. Consider the US Dollar Index prediction at the beginning of the year, which also has a significant deviation. Therefore, I think unexpected expectations in the US have been widely present and may continue to exist this year. The direction will depend on how the policies in the Trump 2.0 era are interpreted, whether it will be a strengthened version or a relatively weaker version. The second important area where unexpected expectations can arise is China. Many chief economists in Hong Kong, including myself and others, have the experience that foreign markets are continuously adjusting, especially after the Politburo meeting on September 26. China is undergoing a major adjustment in macroeconomic policies, including extraordinary countercyclical policies, starting from 2025. I believe that internally, we have not fully grasped how this policy will be implemented in 2025. This policy will most likely take a surprising approach, and we cannot completely anticipate it. On the one hand, the entire market, especially foreign markets, is closely watching this policy shift, but the consensus on the magnitude and potential impact of this policy shift is still in the process of formation. As long as the consensus is still forming, I believe there will be many opportunities for unexpected expectations to emerge in this area. When we talk about the Chinese economy, we often mention that a major problem in the Chinese economy at present is the weak expectations and lack of confidence. However, expectations and confidence are subjective factors that can change suddenly. Although changes in subjective factors often lead to gradual changes that trigger qualitative changes, leading to a shift in faith, this process will accelerate and converge. I believe that this year, the Chinese economy and market are likely to become more positive than expected. The third area that may bring about the most important unexpected expectations is technology. I believe everyone here follows the news, and technology news is often more exciting than many other news. As mentioned earlier, artificial intelligence has made significant progress in various areas, such as embodied artificial intelligence, multimodal artificial intelligence, proactive artificial intelligence, and general artificial intelligence. These advancements are happening rapidly, and every time I see this news, I feel that 2025 could be a turning point in our destiny. Therefore, I believe that the changes technology will bring to the entire human economic world, especially a paradigm shift in science, may become a very important moment in history in 2025. I believe that these three key areas, the US, China, and technology, could generate significant unexpected expectations. These are the areas where investors should be most sensitive and paying attention to. I believe that these areas may offer the greatest potential opportunities. Thank you. Yi Xiong: Thank you for mentioning those three aspects - the US, China, and technology. I think at least two of those aspects, technology and the US, will definitely have a significant impact on a very important market, which is the US stock market. The performance of the US stock market in the past two years will certainly be influenced by technology and the US.The index has increased by over 20%, of course if we only look at the top seven stocks, they even had an increase of over 60% last year.Debt yields and the US dollar are re-strengthening. Under the pressure of possible temporary devaluation of the Renminbi, Hong Kong stocks will definitely also be impacted to a certain extent. However, we need to see a positive change here. When the US dollar index rebounded significantly to 108, we saw that the Hong Kong dollar exchange rate was very strong, even approaching the guaranteed levels of 7.76 or 7.75. Many people were surprised. Usually, when the US dollar strengthens significantly, the Hong Kong dollar, although pegged to the US dollar, should be weak within a certain range. There must be seasonal factors involved, including interest rate differentials that cannot be explained. The only possible explanation is the increasing fundamental demand for the Hong Kong dollar. Where does this demand come from? If you look at the real estate market, it doesn't seem like there is a significant inflow of funds. The stock market has indeed shown some recovery, such as IPO financing activities. Hong Kong may have already returned to the top four globally. In addition, although trading volume has not stabilized at historical levels such as 300 billion or even breaking six hundred billion.2025Excellent, I believe that this year's investment will surely be successful. Alright, we will conclude this sharing session here. Thank you everyone!Hola, cmo ests?