CITIC SEC: The Fed is expected to cut interest rates again at the September meeting.

CITIC SEC released a research report stating that the Federal Reserve maintained the policy interest rate unchanged during the June 2025 meeting, in line with market expectations. Powell's speech was relatively bland, with a slightly hawkish overall tone. It is expected that the number of interest rate cuts by the Federal Reserve this year will be less than or equal to 2 times, or there may be another rate cut at the September meeting. In the short term, it is predicted that there is limited downside for the US dollar index, and it is recommended to continue to focus on the rebound trend of AI sector and core assets such as MAG7 in the US stock market. The 10-year US Treasury bond has some trading value when the interest rate is above 4.5%. Key points of the June 2025 Federal Reserve meeting statement: 1) On interest rate tools, the committee decided to maintain the target range of the federal funds rate at 4.25-4.5%, in line with market expectations, and this rate decision was unanimously agreed upon by FOMC members. 2) On the balance sheet, the committee maintained the pace of balance sheet reduction unchanged, with a monthly redemption limit of $5 billion for US Treasuries, $35 billion for institutional debt, and $350 billion for MBS. 3) Regarding the economic outlook, despite fluctuations in net exports affecting the data, recent indicators show that economic activity continues to expand steadily. The unemployment rate remains low, the labor market conditions are stable, and inflation rates are slightly high. The committee aims to maximize employment in the long term and keep inflation rates at around 2%. While the uncertainty about the economic outlook has decreased, it is still relatively high. The committee closely monitors the risks that may arise from its dual mandate. The key points of the June 2025 Federal Reserve meeting statement compared with the previous meeting: Changed "unemployment rate staying low in recent months" to "unemployment rate remaining low," changed "further aggravation of economic uncertainty" to "economic uncertainty has decreased but remains relatively high," and deleted "risks of rising unemployment and inflation rates." These statement changes reflect more recent economic data. The dot plot for this meeting shows a central target interest rate of 3.9% for this year, unchanged from the March meeting dot plot. It once again raised the inflation and unemployment rate forecasts for this year, and lowered the economic growth forecast. The dot plot for this meeting predicts an endpoint interest rate of 3.9% for this year, consistent with the March meeting dot plot, implying a further 50bps rate cut this year. Looking at the specific votes on the dot plot, there are 7 votes in favor of maintaining the interest rate between 4.25-4.5% this year (an increase of 3 votes from March), 2 votes in favor of a 25bps rate cut (a decrease of 2 votes from March), 8 votes in favor of a 50bps rate cut (a decrease of 1 vote from March), and 2 votes in favor of a 75bps rate cut (unchanged from March). In terms of economic forecasts, compared to the March SEP, this SEP once again lowered the US GDP growth forecast for 2025 (1.4% compared to 1.7% in March and 2.1% in December 2024), raised the unemployment rate forecast for 2025 (4.5% compared to 4.4% in March and 4.3% in December 2024). Regarding inflation forecasts, the year-over-year PCE increase for this year was revised upwards from 2.7% in March to 3.0% (2.5% in December 2024), and the core PCE year-over-year increase was revised upward from 2.8% in March to 3.1% (2.5% in December 2024). This SEP indicates that long-term interest rates are unchanged at 3.0%. The changes in SEP economic forecasts imply that the Federal Reserve believes there is a risk of mild stagflation in the future of the US economy. Powell's speech was relatively bland, with a slightly hawkish overall tone. In terms of uncertainty, Federal Reserve Chairman Powell stated that the uncertainty caused by Trump's tariff policies peaked in April and has since eased (although still at high levels). Regarding economic growth, Powell stated that domestic demand in the US remains resilient, the job market is still generally balanced, economic growth remains solid pace, and survey data shows an improvement in sentiment. In response to questions from reporters about the possible "oil price rise-inflation rise" effect caused by the situation in the Middle East, his response was calm, stating that the current situation is different from the energy crisis of the 1970s, and the current situation in the Middle East will not lead to sustained inflation. Powell did not provide incremental information on interest rate policy. The key point of this meeting lies in the contradiction between the statement and the SEP, as well as the divergence in the dot plot. Faced with the uncertainty of tariff policy, the Federal Reserve has shifted slightly towards controlling inflation risks. On one hand, the statement deleted the sentence "risks of rising unemployment and inflation rates," while the SEP once again raised the inflation and unemployment rate forecasts for this year and lowered the economic growth forecast, creating a contradiction. On the other hand, the dot plot for this meeting shows a large internal divergence within the Federal Reserve, with 7 votes in favor of keeping the interest rate between 4.25-4.5% unchanged this year and 8 votes in favor of a 50bps rate cut, showing a clear division. Compared to the March dot plot, the voting members of this meeting are more hawkish. From Powell's speech, he leans more towards inflation risks, mentioning the uncertainty of the inflation process due to tariffs, and he did not provide additional information on interest rate policy. Additionally, he mentioned that the current US economic performance does not require an urgent adjustment in interest rates, noting that US economic growth is in the range of 1.5-2.0% (compared to the SEP forecast of 1.4% for the year), and the current unemployment rate is still low in historical cycles. It is evident that Powell believes the Federal Reserve still has the "economic capital" to assess the situation as it develops, waiting for the impact of tariffs on inflation to become clearer and showing a certain tolerance for a slowdown in economic growth and an increase in unemployment. Looking at the voting members of the dot plot, there is an increase in the number of officials who share Powell's views. Faced with the uncertainty of tariff policy, the Federal Reserve has shifted slightly towards controlling inflation risks. CITIC SEC still expects the number of interest rate cuts by the Federal Reserve this year to be less than or equal to 2 times, or there may be another rate cut at the September meeting. From the recent economic data released by the United States, on one hand, US inflation showed a mild performance in May, but CITIC SEC believes this buffering will be temporary and expects core commodity prices to reflect the boost from tariffs more prominently starting in the middle of this year. On the other hand, the US unemployment rate from January to May (rounded to three decimal places) continued to rise slightly, indicating a gradual weakening of the US job market. The current job vacancy rate has returned to pre-pandemic levels, with limited cushioning and a continuing deterioration in the job market, which may lead to a faster rise in unemployment rates. Overall, CITIC SEC believes that the gradual weakening of the job market in the US provides room for further interest rate cuts by the Federal Reserve this year. However, the rebound in inflation will constrain the extent of rate cuts, maintaining the previous assessment that the number of interest rate cuts by the Federal Reserve this year will be less than or equal to 2 times, or there may be another rate cut at the September meeting. In the market, in the short term, CITIC SEC predicts that there is limited downside for the US dollar index, and it is recommended to continue to focus on the rebound trend of AI sector and core assets such as MAG7 in the US stock market. The 10-year US Treasury bond has some trading value when the interest rate is above 4.5%. The Federal Reserve's decision to maintain the interest rate unchanged at this meeting was in line with market expectations. Although the overall stance was slightly hawkish, the dot plot still retained the expectation of two interest rate cuts this year, and did not have a significant impact on the performance of global asset classes. Looking ahead, CITIC SEC recommends seeking trading opportunities in high price volatility in asset prices. For US Treasury bonds, issues surrounding US fiscal sustainability and the legislative process for OBBB will disturb the market and provide upward support for US bond rates. The 10-year US Treasury bond has some trading value when the interest rate is above 4.5%, but caution is needed for risks such as resolving the debt ceiling, implementing tax policies, and a rebound in US inflation. For the US dollar, although the performance of the US dollar has been weak recently, considering the impact of tariffs on the economies of Europe and Japan and the support to the US economy from the implementation of tax reform, it is expected that there is limited downside for the US dollar index. For US stocks, it is recommended to continue to focus on the trend of the rebound of the AI sector and core assets such as MAG7 in the US stock market. For the domestic market, with the Federal Reserve maintaining interest rates unchanged, the sensitivity to the Federal Reserve's policy is expected to decrease in the short term, and it is advisable to pay more attention to industrial trends, progress in tariff negotiations, and recent geopolitical disturbances.