CITIC SEC: How to decipher the confusing pace of interest rate cuts by the Federal Reserve?

CITIC SEC released a research report stating that, based on the current situation, if this year the US unemployment rate increases by 0.5% - 1% from its current level, or if the US adds nearly 100,000 fewer non-farm employment, or if the service industry PMI rapidly falls near 50, it may trigger the Federal Reserve to resume interest rate cuts. The probability of the Federal Reserve reopening interest rate cuts after March of this year is higher. In addition, if some black swan events occur this year causing a liquidity crisis in the US financial markets, it may quickly trigger a rate cut by the Federal Reserve. The recent decline in the 10-year US treasury yield, reaching 4.9%, may be a temporary peak, and attention should still be paid to the impact of Trump's policies and economic data. Key points from CITIC SEC: Looking back at history, a weak US job market and panic spreading, leading to a liquidity crisis in financial markets, have been the core triggers for the Federal Reserve to reopen interest rate cuts in past rate cut cycles. In 2002, weak new non-farm employment data, manufacturing PMI falling near 50, and service industry PMI showing some weakness, combined with financial scandals like Enron and Tyco in 2002 undermining investor confidence, led to a rapid decline in the S&P 500 index from May 2002. As a result, the Federal Reserve resumed interest rate cuts in November 2002, cutting rates by 50 basis points. Similarly, during the subprime mortgage crisis in 2008, the bankruptcy of Lehman Brothers triggered global financial market panic, causing a sharp drop in US stocks. Combined with a weakening US economy during a pause in interest rate cuts, the Federal Reserve resumed interest rate cuts in October 2008 and further cut rates in December to address the liquidity crisis. During the rate cut cycle in 1995 where the US successfully achieved an economic soft landing, the Federal Reserve only cut interest rates three times. Subsequently, as the US economy showed clear signs of recovery and sustainability in the later stages of the rate cut cycle, the Federal Reserve did not resume rate cuts after pausing. Looking back at history, a weak US economy and a liquidity crisis in US financial markets may lead to the Federal Reserve reopening interest rate cuts. Based on the current situation, if this year the US unemployment rate increases by 0.5% - 1% from its current level, or if the US adds nearly 100,000 fewer non-farm employment, and the service industry PMI rapidly falls near 50, it may trigger the Federal Reserve to reopen interest rate cuts. In this scenario, the probability of the Federal Reserve reopening interest rate cuts after March of this year is higher. Additionally, if some black swan events occur this year causing a liquidity crisis in US financial markets, triggering severe market panic (for example, the S&P 500 index rapidly declining by more than -10% in 30 days, significant deviations in fund rates from policy rates, etc.), it may quickly trigger the Federal Reserve to cut rates. Even if the Federal Reserve resumes raising interest rates, it is unlikely to happen this year. After the Federal Reserve cut rates in 1995, they quickly raised rates again in March 1997 mainly due to strong economic recovery and rising inflation concerns. This year, disruptions in the pace of US economic recovery due to factors like Trump's tariff policy and tax policy show that while there are signs of US economic recovery, it is still not stable. It is expected that the US economy needs to grow healthily for at least six months for the Federal Reserve to confirm the stability of economic growth. On the other hand, even if Trump's tariff policy is quickly implemented in the first quarter of this year, the pressure of tariffs on US inflation is expected to have a lag of at least half a year. To confirm overheating in the US economy or rising inflation pressures, the Federal Reserve is also expected to need a window of at least 6 months to observe. Therefore, the probability of a rate hike this year is low, but the possibility of the Federal Reserve resuming rate hikes in 2026 or 2027 cannot be ruled out. Previously, extremely hawkish trading pushed the yield on 10-year US Treasury bonds to continue rising, but recently, a decline in US inflation pressures has driven a pullback in bond yields, and it is expected that the previous high point of 4.9% may be a temporary peak for 10-year US Treasury yields. In recent days, the 10-year US Treasury yield has risen and fallen, mainly due to the US CPI data released on the evening of January 10 (Beijing time) showing a weakening in current US core inflation pressures, with core services stabilization at around 0.3% month-on-month and core goods fluctuating around 0% for months. It is expected that the recent 4.9% yield on 10-year US bonds was a result of extremely hawkish trading, or a temporary peak for bond yields, and future changes in policy after Trump's inauguration on January 20 and subsequent US economic data disclosures (PCE, GDP, etc.) need to be closely monitored for their impact on US financial markets. Risk factors: - Trump's policies after taking office exceed expectations; - Risks of trade disputes between the US and other countries exceed expectations; - US economic and inflation stickiness exceeds expectations; - US monetary policy exceeds expectations; - Geopolitical risks exceed expectations, etc.