CITIC SEC: The Fed's preventive rate cut lands as expected, but next year's interest rate path is still unclear.

CITIC SEC issued a research report stating that the Federal Reserve will cut interest rates by 25bps at the September 2025 meeting, in line with market expectations. Powell stated that this is a risk management-style rate cut, leaning towards controlling the downward risk in the job market in the dual mandate. The dot plot for this meeting shows a central target rate of 3.6% for this year, lower than the 3.9% shown in June, while raising the forecast for US economic growth this year and maintaining forecasts for US inflation and unemployment rates. The dot plot indicates an expected further 50bps rate cut within the year, and it is still expected that the Fed will cut rates by 25bps at the October and December meetings. The rate path for 2026 will only become clearer once the new Fed chair's final selection is made. In the market, after the rate cut, US bonds exhibited the "buy the rumor, sell the fact" pattern, with US stocks showing a "rebound" feature, notably the Dow Jones and small-cap stocks performing well. It is suggested to downplay the guidance on next year's rate path from this meeting, with the expectation that the dollar may remain weak in this round of rate cuts and that gold may still perform well. Key points from the CITIC SEC report on the September 2025 Fed meeting statement: 1) In terms of interest rate tools, the committee decided to cut rates by 25bps, lowering the federal funds rate target range to 4.00-4.25%, in line with market expectations. This rate decision was not unanimous, with temporary director Milan voting to support a 50bps rate cut. 2) In terms of the balance sheet, the committee maintained the pace of tapering, with a monthly cap on US Treasury redemptions of $5 billion and a monthly cap on agency debt and MBS redemptions of $35 billion. 3) On the economic outlook, recent indicators show that US economic activity growth slowed in the first half of the year. Job growth has slowed, the unemployment rate has slightly risen but remains low. Inflation has increased somewhat but remains at a slightly high level. The committee aims to maximize employment over the long term and keep inflation around 2%. Uncertainty about the economic outlook remains high. The committee closely monitors the risks faced in its dual mandate and judges that the downside risks to the job market have increased. The changes in the September 2025 Fed meeting statement relative to the previous meeting are significant. The statement no longer mentions the impact of net exports fluctuations on data and replaces the previous mention of the low unemployment rate and stable labor market conditions with a reference to slowing job growth and a slightly rising unemployment rate but still at a low level. It also changes the mention of inflation from being slightly high to having increased somewhat and remaining at a slightly high level. The dot plot for this meeting shows a central target rate of 3.6% for this year, lower than the 3.9% shown in June, while raising the forecast for US economic growth this year and maintaining forecasts for US inflation and unemployment rates. The dot plot for this meeting projects a year-end rate of 3.6%, lower than the 3.9% shown in June, implying a total of 50bps rate cuts remaining for the year. Looking at the specific votes in the dot plot, there is 1 vote to keep rates unchanged at 4.25-4.50% for the year, 6 votes to keep rates at 4.00-4.25% after this rate cut, 2 votes for a further 25bps rate cut within the year, 9 votes for another 50bps rate cut within the year, and 1 vote for rates to end the year at 2.75-3%. In terms of economic forecasts, compared to the June SEP, this SEP raised the forecast for US GDP growth in 2025 (1.6% in this latest SEP) but kept the forecast for the unemployment rate unchanged. As for inflation, the forecasts for PCE and core PCE annual growth rates were maintained at 3.0% and 3.1% respectively. Powell stated that this is a risk management-style rate cut, leaning towards controlling the downward risk in the job market in the dual mandate. First, in terms of the nature of the rate cut, with no adjustments to the forecasts for this year's unemployment rate and inflation but an increase in the economic growth forecast, Powell stated that the 25bps rate cut can be understood as a risk management cut, in line with previous expectations. It was expected that the Fed would cut rates by 25bps at the September meeting and start a preemptive rate cut cycle. Since it is a preemptive rate cut, a 25bps rate cut is appropriate, and Powell indicated that a 50bps rate cut did not receive broad support. Second, in terms of the dual mandate, Powell stated that the job market is weakening, with weaknesses in both supply and demand, but more so in demand. The job market is overall in a weak balance, with recent downward revisions in non-farm payroll reports and an uptick in the unemployment rate showing this. Regarding inflation, Powell stated that service inflation is declining, and he still believes that the temporary inflation caused by tariffs on goods is a one-time event. American companies have borne more of the costs in this round of tariffs. In terms of the transmission of tariff-related inflation, American importers are the main bearers of the tariff increases in US cross-border trade. Considering both inflation and job market conditions, Powell stated that the current policy rate leans more towards preventing downside risks in the job market. Third, regarding Fed independence, Powell did not respond to questions about temporary director Milan, director Cook who was asked to resign by Trump, Treasury Secretary Bezent, and whether he himself will leave the Fed in May next year. The 25bps rate cut at this meeting and the indication in the dot plot of a further 50bps rate cut within the year are in line with expectations. It is still expected that the Fed will cut rates by 25bps at the October and December meetings. The rate path for 2026 will only become clearer once the new Fed chair's final selection is made, and there may be significant uncertainties in the market regarding the rate path for next year until then. Regarding the future rate path, although Powell stated that the rate path is not predetermined, the median in the dot plot points to a total of 75bps rate cuts in this year, aligning with previous expectations for a total of 75bps rate cuts for the year. The rate path for this year does not have much significance, with more focus on next year's rate path. The SEP shows a year-end rate of 3.4% for next year, down from the 3.6% in the June SEP. However, the SEP forecast for next year's GDP growth of 1.8% is higher than the previous 1.6%, while the forecast for next year's unemployment rate of 4.4% is lower than the previous 4.5%. The forecasts for next year's inflation (PCE and core PCE year-on-year growth of 2.6%) are higher than the previous forecasts (PCE and core PCE year-on-year growth of 2.4%). The contradiction between the lower rate forecast for next year and the forecasts for economic changes next year may, to some extent, be influenced by the dispersion in the dot plot for 2026, showing no consensus among FOMC members on the rate path for next year. The rate path for 2026 will only become clearer once the new Fed chair's final selection is made, and there may be significant uncertainties in the market regarding the rate path for next year until then. Powell's term extends until May next year, and Trump is likely to announce the final candidate between Walle, Wash, and Hasset before the end of this year. Concerning temporary director Milan, who voted for a 50bps rate cut at this meeting and believes rates should end the year at 2.75-3%, Milan's temporary term extends until January next year, and he will likely express more dovish views during this temporary period to align with Trump's wishes, given his simultaneous role in the White House. Powell stated that of the 19 FOMC members, 12 voted, with the opinion of individual voters not influencing the overall decision. He also recommended downplaying Milan's related statements. In the market, after the rate cut, US bonds exhibited the "buy the rumor, sell the fact" pattern, with US stocks showing a "rebound" feature, notably the Dow Jones and small-cap stocks performing well. It is suggested to downplay the guidance on next year's rate path from this meeting, with the expectation that the dollar may remain weak in this round of rate cuts and that gold may still perform well. After the rate cut in September, US bonds, as expected, once again followed the pattern of "buy the rumor, sell the fact," with both 2Y and 10Y yields rising. In terms of US stocks, the Dow Jones closed higher, while the S&P 500 and the Nasdaq saw slight declines, with small-cap stocks performing relatively well and exhibiting a "rebound" pattern. Maintaining previous views, it is expected that in preemptive rate cuts, US stocks will not see significant downward adjustments, and indices or sectors sensitive to rates will perform better. Gold prices fell that evening, and the dollar strengthened somewhat, possibly due to the significant rally in the previous trading session based on expectations, and the guidance on the 2026 rate path from this meeting not being dovish enough. As previously mentioned, it is suggested to downplay the guidance on next year's rate path from this meeting, considering Trump's preference for a weak dollar, Fed independence issues, and the expected convergence of US-EU interest rate differentials (with expectations that the ECB will not cut rates again this year), with the dollar likely to remain weak in this round of rate cuts and gold expected to perform well. Risk factors: Higher-than-expected rebound in US inflation; Weaker-than-expected labor market in the US; Trump's tariff policy exceeding expectations; Unexpected changes in Fed independence.