CITIC SEC: It is expected that the Federal Reserve will cut interest rates by 25 basis points once in the second half of the year.

CITIC SEC released a research report stating that the Federal Reserve's interest rate policy in March 2026 will remain unchanged, in line with market expectations. The dot plot for this meeting shows a target rate midpoint for the year of 3.4%, consistent with December 2025, while also raising inflation forecasts for the year slightly and economic growth forecasts, while maintaining the unemployment rate forecast unchanged. Powell did not make any judgments on the situation in Iran and oil prices as scheduled, and the confidence in the tariff-induced inflation downturn has further weakened since January. It is expected that the Fed will not cut rates in April, and after Powell takes the chairmanship, there will be a 25 basis point rate cut in the second half of the year. Regarding the FOMC personnel issue, if the US Department of Justice withdraws its investigation into Powell, Wash is likely to be confirmed smoothly through the Senate appointment process, and Powell will also resign from the Board of Governors after the end of his term as chairman. The current consensus within the FOMC is no better than in the past, whether Powell continues to chair meetings in the short term or Wash successfully takes over as chairman, it is important to closely monitor the statements of the 12 voting members in office. The Fed's monetary policy path depends more on the balance of votes among FOMC members, and the Chairman's personal statements have less guiding influence on the market than in the past. The main points of CITIC SEC are as follows: Key points of the March 2026 Federal Reserve meeting: 1) On the interest rate front, the committee decided to keep the target range for the federal funds rate unchanged at 3.5-3.75%, in line with market expectations. The interest rate decision was not unanimous, with Milan voting in favor of a 25bps rate cut. 2) Regarding the balance sheet, the Fed continues to maintain stability through Reserve Management Purchases (RMP): Treasury securities are renewed upon maturity, institutional assets naturally recover and are reinvested in T-bills, and reserves are supplemented by purchasing T-bills when necessary to maintain an adequate reserve level. The New York Fed's website shows that there will be around $13.8 billion in reinvestment purchases and around $40 billion in reserve management purchases from March 13 to April 13. 3) In terms of economic outlook, current indicators show that economic activity has been steadily expanding. Employment growth remains slow, with little change in the unemployment rate in recent months. Inflation remains slightly high. The committee aims to achieve full employment and to maintain inflation at the target level of 2% in the long term. There is still a high degree of uncertainty in the current economic outlook. The impact of developments in the Middle East on the US economy is still unclear. The committee is closely monitoring the risks faced by its dual mandate. Changes in the March 2026 Federal Reserve meeting statement relative to the January meeting include: 1) Adjustment to the employment statement, changing the previous statement from "the unemployment rate has shown some signs of stabilization" to "the unemployment rate has been little changed in recent months"; 2) Additional statement on geopolitical issues, adding "the implications of developments in the Middle East for the US economy are uncertain". The dot plot for this meeting shows a target rate midpoint for the year of 3.4%, consistent with December 2025, while also raising this year's inflation forecast for the United States slightly and economic growth forecast, and keeping the unemployment rate forecast unchanged. The dot plot for this meeting predicts a year-end rate of 3.4%, consistent with December 2025, implying a 25bps rate cut later this year. Looking at the specific voting patterns in the dot plot, 7 voters believe that there will be no rate cut this year, while 7 voters believe in a 25bps rate cut. There are 2 voters who believe the rate will be between 3-3.25%, 2 voters who believe it will be between 2.75-3%, and 1 voter who believes it will be between 2.5-2.75%. Compared to the previous dot plot, this time there is a noticeable increase in concentration. In terms of economic forecasts, compared to the December 2025 SEP, the March SEP raises this year's GDP growth forecast slightly from 2.3% to 2.4%; the unemployment rate forecast remains unchanged at 4.4%; the PCE inflation forecast is raised from 2.4% to 2.7%, and the core PCE inflation is raised from 2.5% to 2.7%; the forecast for long-term interest rates is raised from 3.0% to 3.1%. Powell did not make any judgments on the situation in Iran and oil prices as scheduled, and the confidence in the tariff-induced inflation downturn has further weakened since January. It is expected that the Fed will not cut rates in April, and after Powell takes the chairmanship, there will be a 25 basis point rate cut in the second half of the year. First, regarding the situation in the Middle East, Powell as scheduled adopted a "wait and see" approach, stating it is unclear about the scale and duration of the impact, mentioning the traditional view is to "look through" energy shocks. He mentioned that rising energy prices have led to a slight increase in short-term inflation expectations, but differentiated the current situation from the stagflation environment of the 1970s. Second, regarding tariff-induced inflation, Powell had previously stated at the December 2025 FOMC meeting that "goods inflation may peak in the first quarter of 2026," but at the January meeting, he stated that "tariff-induced inflation may peak in the middle of the year," which was the most important change at the January meeting. At the March meeting, Powell reiterated that the impact of tariffs would be fully transmitted by mid-year, but noted that the improvement in inflation was not as expected, and a rate cut would be premised on inflation improvement ("The forecast is that we will be making progress on inflation, not as much as we had hoped, but some progress on inflation. It should come as we start to see in the middle of the year, progress on tariffs, you know, going through once and then inflation coming down." and "You know the rate forecast is conditional on the performance of the economy. So if we don't see that progress then you won't see the rate cut."). Compared to Powell's responses on the situation in Iran and oil prices, his further weakened confidence in the downturn of tariff-induced inflation reduction since January is worth noting, combined with the upward revision of the core PCE in the SEP, the reduction in inflation has become a prerequisite for the rate cut retained in the dot plot. Third, regarding the two-way nature of rate changes, the minutes of the January FOMC meeting showed that some participants believed that they supported a "two-way description" of interest rate decisions, to reflect the possibility of raising the target range for the federal funds rate if inflation remains above target levels in the future (Several participants indicated that they would have supported a two-sided description of the Committee's future interest rate decisions, reflecting the possibility that upward adjustments to the target range for the federal funds rate could be appropriate if inflation remains at above-target levels). Powell stated at this press conference that the vast majority of members did not see the next step as a rate hike being the baseline scenario. The "Iranian situation - oil price trends - inflation expectations" are full of uncertainties, and the Fed needs to observe more patiently. Although the February non-farm payroll report was weaker than expected due to factors such as strikes, weather, and statistical adjustments, it somewhat offset the strong non-farm payroll report in January. It is expected that the Fed will not cut rates in April, and after Powell takes the chairmanship, there will be a 25 basis point rate cut in the second half of the year. Regarding the FOMC personnel issue, if the US Department of Justice withdraws its investigation into Powell, Wash is likely to be confirmed smoothly through the Senate appointment process, and Powell will also resign from the Board of Governors after the end of his term as chairman. The current consensus within the FOMC is no better than in the past, whether Powell continues to chair meetings in the short term or Wash successfully takes over as chairman, it is important to closely monitor the statements of the 12 current voting members. The Fed's monetary policy path depends more on the balance of votes among FOMC members, and the Chairman's personal statements have less guiding influence on the market than in the past. Trump's appointment of Wash as the new Fed chairman is currently facing resistance in the Senate. Due to the ongoing investigation by the US Department of Justice into Powell, Republican Senator Thom Tillis stated that he would block any Fed personnel appointments from entering the voting process until the investigation is completed, reducing the likelihood of Wash's confirmation as of May 15 before Powell's term as chairman ends. At this press conference, Powell also addressed this issue, stating that if the successor has not been confirmed by the Senate, he will continue to chair meetings as the interim chairman until the new chairman is confirmed. On March 14, according to Reuters, Powell's lawyer communicated with the Department of Justice about the possibility of Powell remaining a member of the Federal Reserve Board after his term as chairman ends. Powell stated at the press conference that he has no intention of leaving the Federal Reserve before the Justice Department's investigation is completed, and has not decided how long he will remain at the Fed. A reverse understanding of this event is reasonable, if the Justice Department withdraws its investigation into Powell, Wash is likely to be confirmed smoothly through the Senate appointment process, and Powell will also resign from the Board of Governors after the end of his term as chairman. The current consensus within the FOMC is no better than in the past, as Powell has repeatedly mentioned at recent monetary policy meetings that "every one of the 19 members has their own forecast." Whether Powell continues to chair meetings in the short term or Wash successfully takes over as chairman, it is important to closely monitor the statements of the 12 current voting members. The Fed's monetary policy path depends more on the balance of votes among FOMC members, and the Chairman's personal statements have less guiding influence on the market than in the past. Risk factors: Weaker-than-expected US job market; Escalation of the situation in Iran beyond expectations; Trump's policies beyond expectations; Fed's hawkish stance beyond expectations.