CITIC Securities Co., Ltd.: It is expected that the Federal Reserve may cut interest rates again at the September monetary policy meeting

According to the Zhitong Finance APP, CITIC Securities has released a research report stating that the Federal Reserve will maintain the policy interest rate unchanged at the June 2025 meeting, which is in line with market expectations. Powell's remarks were relatively bland, with an overall slightly hawkish stance. It is expected that the Federal Reserve will lower interest rates no more than 2 times this year, and may cut rates again at the September meeting. In the short term, it is anticipated that the US dollar index has limited further downside potential, and it is recommended to continue focusing on the AI sector and the rebound trend of "core assets" such as MAG7 in the US stock market. The 10-year US Treasury bonds have certain trading value when the interest rate level is above 4.5%.

Key points from the Federal Reserve's June 2025 meeting statement:

1. In terms of interest rate tools, the committee decided to maintain the target range for the federal funds rate at 4.25-4.5%, which is in line with market expectations, and this rate decision received unanimous agreement from FOMC members.

2. Regarding the balance sheet, the committee maintained the pace of balance sheet reduction, with a monthly redemption cap of $5 billion for US Treasury bonds and $35 billion for agency debt and MBS.

3. In terms of economic outlook, although net export fluctuations have affected the data, recent indicators show that economic activity continues to expand steadily. The unemployment rate remains low, and the labor market conditions remain robust. Inflation rates are still slightly high. The committee aims to achieve maximum employment in the long term while keeping the inflation rate around 2%. The uncertainty of the economic outlook has diminished but remains high. The committee closely monitors the risks that may arise from its dual mandate.

Changes in the June 2025 Federal Reserve meeting statement compared to the previous meeting are minimal:

The phrase "the unemployment rate has stabilized at a low level in recent months" was changed to "the unemployment rate remains low," and "the uncertainty of the economic outlook has further intensified" was changed to "the uncertainty of the economic outlook has diminished but remains high." The statement "the risk of rising unemployment and inflation rates has increased" was deleted. This statement reflects the situation of recently published economic data more.

The dot plot this time shows the target interest rate midpoint for this year at 3.9%, consistent with the dot plot from the March meeting, while again raising the inflation and unemployment rate forecasts and lowering the economic growth forecast.

The dot plot this time expects the terminal interest rate for this year to be 3.9%, consistent with the dot plot from the March meeting, implying that there is still a 50bps rate cut this year. From the specific voting patterns in the dot plot, 7 votes support maintaining the rate at 4.25-4.5% (an increase of 3 votes from March), 2 votes believe there will be a 25bps rate cut (a decrease of 2 votes from March), 8 votes for 50bps (a decrease of 1 vote from March), and 2 votes for 75bps (unchanged from March). In terms of economic forecasts, compared to the March SEP, this SEP again lowered the US GDP growth forecast for 2025 (December 2024 was 2.1%, March was 1.7%, this time is 1.4%), and raised the unemployment rate forecast (December 2024 was 4.3%, March was 4.4%, this time is 4.5%). In terms of inflation forecasts, the PCE year-on-year growth rate for this year was raised from 2.7% in March to 3.0% (December 2024 is 2.5%), and the core PCE year-on-year growth rate was raised from 2.8% in March to 3.1% (December 2024 is 2.5%) The latest SEP shows that the forecast for long-term interest rates remains unchanged at 3.0%. The changes in the SEP economic forecast imply that the Federal Reserve believes there is a risk of a mild "stagflation" in the future U.S. economy.

Powell's remarks were relatively bland, with an overall slightly hawkish stance.

Regarding uncertainty, Federal Reserve Chairman Powell stated that the uncertainty brought by Trump's tariff policy peaked in April and has since declined (though still at a high level). On economic growth, Powell indicated that U.S. domestic demand remains resilient, the labor market is still generally balanced, and economic growth remains at a solid pace, with survey data showing a rebound in sentiment. (In this regard, CITIC Securities mentioned in "Overseas Market Cross-Line 20250616 - No Turmoil in Super Central Bank Week for the U.S., U.K., and Japan" that the global tariff negotiation outlook is more optimistic and the improvement in soft economic data in the U.S. after tariff shocks is a recent marginal change regarding tariffs.) On inflation, Powell stated that the impact of tariffs on inflation remains uncertain, saying, "We know inflation is coming, but we are unclear about the scale." When responding to a reporter's question about the potential "oil price increase - inflation increase" effect caused by the Middle East situation, he reacted blandly, stating that the current situation is different from the energy crisis of the 1970s, and the Middle East situation will not cause sustained inflation effects. On interest rate policy, Powell did not provide incremental information.

The key points of this meeting lie in the contradictions between the statement and the SEP, as well as the divergences in the dot plot. In the face of uncertain tariff policies, the Federal Reserve has shifted overall towards controlling inflation risks.

On one hand, the statement removed the phrase "the risks of rising unemployment and inflation have increased," while the SEP simultaneously raised this year's inflation and unemployment rate forecasts and lowered the economic growth forecast, creating a contradiction. On the other hand, this dot plot shows significant internal divergence within the Federal Reserve, with 7 votes for maintaining the interest rate at 4.25-4.5% this year and 8 votes for a 50bps rate cut, indicating clear divergence. Compared to the March dot plot, this voting pattern is more hawkish. From Powell's remarks, he appears to lean more towards inflation risks; during this press conference, he repeatedly stated that U.S. economic growth and the labor market are robust, while mentioning inflation, he emphasized that the inflation effects of tariffs are uncertain. Additionally, he mentioned twice that the current performance of the U.S. economy is the reason for not rushing to adjust interest rates, noting that U.S. economic growth is in the range of 1.5-2.0% (the current SEP economic growth forecast for the year is 1.4%), and the current unemployment rate is still very low in historical cycles. This indicates that Powell believes the Federal Reserve still has "economic capital" to "wait and see," allowing for some tolerance towards declines in economic growth and increases in unemployment rates in light of the uncertain impact of tariffs on inflation. From the dot plot voting pattern, the number of officials whose views align with Powell's has increased, indicating that in the face of uncertain tariff policies, the Federal Reserve has shifted overall towards controlling inflation risks.

CITIC Securities still expects the Federal Reserve to cut interest rates no more than 2 times this year, possibly cutting rates again at the September meeting.

From the recent economic data disclosed in the U.S., on one hand, U.S. inflation showed moderate performance again in May, but CITIC Securities is more inclined to view this buffer as a temporary phenomenon, expecting core commodity prices to more clearly reflect the boost from tariffs starting mid-year (see "U.S. May 2025 CPI Commentary - The Transmission of Tariffs to Inflation is Slower than Expected") (2025-06-12); On the other hand, the unemployment rate in the U.S. from January to May has continued to rise slightly (retaining three decimal places), indicating that the U.S. job market continues to weaken moderately. The current job vacancy rate has returned to pre-pandemic levels, with limited "buffer" available, suggesting that the unemployment rate may accelerate its upward trend as the job market continues to weaken (see "Commentary on U.S. Non-Farm Data for May 2025 - Unemployment Rate on the Rise," 2025-06-07). Overall, CITIC Securities believes that the gradual weakening of the job market provides the Federal Reserve with room for interest rate cuts this year, but a rebound in inflation will constrain the extent of these cuts. They maintain their previous judgment, expecting the Federal Reserve to cut rates no more than or equal to 2 times this year, with another potential cut at the September meeting.

In terms of the market, in the short term, CITIC Securities expects limited further downside for the U.S. dollar index. The U.S. stock market continues to focus on the rebound trends of the AI sector and MAG7 and other "core assets" in U.S. stocks. The 10Y U.S. Treasury bonds have certain trading value when interest rates are above 4.5%.

The Federal Reserve's decision to keep interest rates unchanged at this meeting aligns with market expectations. Although the overall stance is somewhat hawkish, the dot plot still retains expectations for two rate cuts this year, which has not significantly impacted the performance of global asset classes. Looking ahead, CITIC Securities suggests seeking trading opportunities amid high volatility in asset prices. Regarding U.S. Treasuries, issues of fiscal sustainability and the legislative process of OBBB will disturb the market and provide upward support for the interest rate center of U.S. Treasuries. The 10Y U.S. Treasury bonds have certain trading value when interest rates are above 4.5%, but caution is still needed regarding risks of further rate hikes due to debt ceiling resolutions, tax policy implementations, and rebounds in U.S. inflation.

As for the U.S. dollar, it has performed relatively weakly recently. However, considering the impact of tariffs on the economies of Europe and Japan, as well as the support for the U.S. economy from the implementation of tax reduction legislation, the further downside for the U.S. dollar index is expected to be limited. For U.S. stocks, it is recommended to continue monitoring the rebound trends of the AI sector and MAG7 and other "core assets" following "reciprocal tariffs." For the domestic market, under the circumstance of the Federal Reserve's policy interest rates remaining unchanged, it is expected that sensitivity to Federal Reserve policies will decrease in the short term, and more attention should be paid to industrial trends, progress in tariff negotiations, and recent geopolitical disturbances