CICC: The Federal Reserve has no plans to rush to cut interest rates; the next rate cut may be in the fourth quarter

According to the Zhitong Finance APP, CICC published a research report stating that the Federal Reserve's decision to remain unchanged at the June meeting aligns with market expectations. Officials believe that policy uncertainty has decreased, but they still lowered growth forecasts and raised inflation path judgments. The dot plot retains the expectation of two rate cuts within the year, but the details have marginally turned "hawkish," reflecting a cautious viewpoint within the Federal Reserve. Powell remains cautious about inflation risks and stated that no one has strong confidence in the interest rate path they have written down. CICC believes that the Federal Reserve has no urgent plans to cut rates, and in a situation where the economy allows for waiting, decision-makers will not act lightly in the face of inflation. CICC maintains its previous view that the next rate cut by the Federal Reserve may occur in the fourth quarter.

CICC's views are as follows:

There are several changes in this meeting: First, the monetary policy statement indicates that the Federal Reserve believes that as negotiations progress, policy uncertainty has decreased. The statement revised the expression from May that "economic outlook uncertainty has further intensified" to "economic outlook uncertainty has diminished but remains elevated," while removing last month's statement that "the risks of higher unemployment and higher inflation have risen." This modification reflects that the Federal Reserve believes that although the policy outlook remains murky, the peak of uncertainty storms within the year may have occurred on April 2, "Liberation Day," and with tariff rates entering a more restrained range, the extreme risks of a cliff-like decline in growth and a vicious increase in inflation have marginally decreased.

Second, the unexpected tariff turmoil has led officials to lower growth forecasts and raise inflation path judgments. The forecast for real GDP growth in the fourth quarter of 2025 has been revised down from 1.7% to 1.4%, the unemployment rate forecast has been raised from 4.4% to 4.5%, the core PCE inflation forecast for the fourth quarter has been raised from 2.8% to 3.1%, and the total PCE inflation forecast has been raised from 2.7% to 3.0%. This also means that officials believe that the current retention of tariffs and other Trump policies will still exert downward pressure on economic growth and expect inflation to experience an upward wave.

Third, the dot plot retains the prediction of two rate cuts within the year, but the details have marginally turned "hawkish," reflecting a cautious viewpoint within the Federal Reserve. The dot plot shows that 10 officials expect at least two rate cuts in 2025, which is comparable to the 11 officials in March, but 7 believe there will be no rate cuts this year, an increase from 4 in March, and two others expect only one rate cut. This also indicates that there is increasing internal disagreement among Federal Reserve officials regarding the same exogenous policy—dovish officials wish to retain rate cut expectations, while hawkish officials have become more hawkish.

In response, Powell candidly stated at the press conference that there are differences in economic forecasts among committee members, and on the same forecast data, there are also differences in risk assessment and policy response equations. Powell himself emphasized that the Federal Reserve cannot assume that inflation shocks are merely one-time events and should actively work to prevent short-term shocks from becoming persistent inflation issues, indicating that Powell may belong to the hawkish camp He also stated that under high uncertainty, no one has strong confidence in the interest rate path they have written down, and all rate cut paths are data-driven and scenario-dependent. The current U.S. economy still shows resilience, so the Federal Reserve's current modestly restrictive interest rate level can "wait."

Powell also mentioned that the weakening core inflation over the past three months is "good news," but the rebound in goods inflation, such as computers and audiovisual products, reflects that some tariff impacts have begun to emerge. He emphasized that the overall impact of tariffs on inflation may take months to fully manifest in the data, as the transmission chain of tariffs is long and complex, covering manufacturers, exporters, importers, retailers, and consumers, making it unpredictable who will bear the costs. In response to a reporter's question—since inflation data is declining, it should support rate cuts from a "data-driven" perspective—Powell stressed that the Federal Reserve must assess inflation risks prospectively rather than making decisions solely based on existing historical data. The current low unemployment rate, robust wage growth, and the economy not being in "urgent need of assistance" allow the Federal Reserve to patiently wait for clearer signals. Regarding the weakness in the real estate market this year due to high interest rates, Powell stated that "restoring price stability is the best thing the Federal Reserve can do for the housing market."

Looking ahead, CICC believes that the Federal Reserve has no urgent plans to cut rates, and in a situation where the economy allows for waiting, decision-makers will not take risks in the face of inflation. Officials' concerns about inflation remain a consensus. At this point, facing external potential variables such as the expiration of the equivalent tariff suspension on July 9, the "Great Beauty" fiscal bill still under Senate review, geopolitical tensions in the Middle East, and rapidly rebounding oil prices, the Federal Reserve still cannot determine when the inflation effects of tariffs will manifest. The best option currently may be to remain on hold and observe whether tariffs will push up inflation or if the job market will weaken first, as whichever of the dual objectives "lights up the red light" first will affect the future path of rate cuts. CICC maintains its previous view that the Federal Reserve's next rate cut may occur in the fourth quarter.

Chart 1: Federal Reserve's June Interest Rate Dot Plot

Source: Federal Reserve, CICC Research Department

Chart 2: Federal Reserve's Economic Indicator Forecast (June 2025)

Source: Federal Reserve, CICC Research Department

Chart 3: Comparison of Federal Reserve Monetary Policy Statements (June 2025 vs. May 2025)

Source: Federal Reserve, CICC Research Department