Haitong Securities: The Federal Reserve pauses interest rate cuts, adopting a wait-and-see approach

According to the Zhitong Finance APP, Haitong Securities released a research report stating that the Federal Reserve decided to pause interest rate cuts at the January FOMC meeting, maintaining the federal funds rate in the range of 4.25%-4.50%. This decision is primarily based on three considerations: first, inflation remains above target levels, and the Federal Reserve hopes to see more significant improvements; second, the U.S. economy is performing strongly, with GDP growth expected to exceed 2% in 2024, and a stable labor market providing the Federal Reserve with more observation time; finally, there is policy uncertainty, particularly regarding the immigration, tariff, and tax policies of the Trump administration, which may impact the economy. Powell emphasized that the current policy is already relatively loose, and rate cuts will only be considered after significant changes in inflation or the labor market. The market expects that the Federal Reserve may cut rates again in June, with a potential 50 basis points cut in 2025.

Haitong International's main viewpoints are as follows:

Interest Rates: Pause on Rate Cuts.

As expected, the pause on rate cuts was implemented. The Federal Reserve's January FOMC meeting decided to pause rate cuts, maintaining the federal funds rate range at 4.25%-4.50%.

Statement: Emphasizing Dual Mandate.

Regarding the economy, it reiterated economic stability, removing the statement "since earlier this year, labor market conditions have generally eased, and the unemployment rate has risen, but remains low," and added the statement "in recent months, the unemployment rate has stabilized at a low level, and labor market conditions remain stable." Regarding inflation, it reiterated that inflation is still high, removing the statement "inflation has made progress towards the Committee's 2% target." However, during the press conference, Powell pointed out that the decision to shorten the statement regarding inflation was not intended to send a signal.

Why Hit the Pause Button?

First, inflation remains elevated. The Federal Reserve emphasized that it hopes to see further improvements in inflation and needs to observe the 12-month inflation performance; the Federal Reserve may not take action before achieving further improvements.

Second, economic performance remains strong. Powell expects U.S. GDP to grow by more than 2.0% year-on-year in 2024. Strong economic and labor market performance gives the Federal Reserve more time to assess the inflation outlook without rushing to cut rates. Powell stated that the current policy is significantly looser compared to when rate cuts began, and substantial progress in inflation or weakness in the labor market is needed before considering rate cuts.

Third, there is uncertainty in policy. The policy path of U.S. President Trump is uncertain, and his immigration, tariff, and tax policies may impact the economy. Powell stated that the Federal Reserve is closely monitoring the policies to be implemented; it is unclear what will happen with fiscal, regulatory, tariff, and immigration policies, and a clear understanding of the policies is needed before assessing their impact on the economy.

Additionally, regarding whether to cut rates in March, Powell stated that there is no need to rush. According to CME observations, the market currently expects the Federal Reserve to cut rates again likely in June. The market anticipates a potential 50 basis points cut in 2025.

Risk Warning: Federal Reserve monetary policy adjustments may exceed expectations