Allianz Investment: Expects the Federal Reserve to remain steady in January and may only cut interest rates once in the first half of 2025
Allianz Investment expects the Federal Reserve to maintain interest rates at the meeting on January 28-29, with a target range of 4.25% to 4.50%. The firm believes that the Federal Reserve may only cut rates once in the first half of 2025, and the policy stance will remain cautious. Despite good economic growth and inflation expectations, market consensus suggests that the Federal Reserve will not lean towards dovish as it has in the past. Allianz Investment also pointed out that if real interest rates and bond term premiums rise, it may affect expectations for U.S. economic growth
According to the Zhitong Finance APP, Michael Krautzberger, Chief Investment Officer of Global Fixed Income at Allianz Investment, commented that the Federal Reserve is expected to remain on hold during its policy meeting on January 28-29, thus keeping the target range for the federal funds rate at 4.25% to 4.50%. The firm believes that the Federal Reserve will maintain a cautious policy stance in the first few months of 2025. Market consensus has shifted to believe that the Federal Reserve's policy stance will not be as dovish as in the past, and the firm expects the Federal Reserve to only cut rates once in the first half of 2025. Considering the growth of the U.S. economy and inflation expectations, the firm believes that the current market consensus is reasonable.
At the same time, Allianz Investment stated that if its expectations for the U.S. real interest rates and bond term premiums further rebound, this could be enough to tighten the U.S. financial environment and weaken the higher growth expectations for the U.S. economy this year, prompting the Federal Reserve to take action again.
The firm believes that the current market environment is conducive to the steepening of the U.S. yield curve. Given the potential inflation risks in the U.S. in 2025, from a strategic perspective, the firm tends to adopt a strategy focused on U.S. short-duration securities and U.S. inflation-protected bonds.
With the new U.S. government taking office, the U.S. economy continues to perform well, with almost no signs indicating a sharp deterioration in the labor market. Meanwhile, driven by Trump's pro-growth policy agenda, the market is generally optimistic about the U.S. economic outlook this year, forecasting economic growth of 2.2% in 2025 and 2.8% in 2024. However, the inflation situation is more complex; although inflationary pressures have eased, the Federal Reserve's preferred core PCE inflation measure remains above the target of 2.8% year-on-year growth. Therefore, the firm believes that the Federal Reserve will maintain a cautious policy stance when assessing new growth and inflation data, adopting a wait-and-see attitude in the short term