CICC: The Federal Reserve restrains interest rate cuts under supply constraints

According to the Zhitong Finance APP, CICC released a research report stating that the Federal Reserve's interest rate cut of 25 basis points in September met market expectations. The Federal Reserve responded well to market concerns but also maintained restraint. The anticipated 50 basis point cut did not occur, and there is significant disagreement among decision-makers regarding the next rate cut. Looking ahead, due to excessively weak employment data, CICC expects the Federal Reserve may cut rates again in October, but after that, rising inflation will raise the threshold for further cuts, limiting the space for monetary easing. The current issue with the U.S. economy is not insufficient demand but rising costs. Excessive monetary easing may not only fail to resolve employment issues but could also exacerbate inflation, leading the economy into a "stagflation-like" predicament.

CICC's main points are as follows:

Before this meeting, the market had high expectations for a Federal Reserve rate cut. Due to a weak labor market, investors generally believed the Federal Reserve must act now to prevent further declines in employment data.

We believe the Federal Reserve responded well to market concerns but also maintained restraint. First, from a policy stance, the Federal Reserve cut rates as expected and cited the slowdown in employment as a reason for the cut. The monetary policy statement indicated that decision-makers believe "the downside risks to employment have increased," although they also noted that "inflation levels have rebounded and remain elevated." In other words, concerns about the slowing labor market outweighed worries about inflation, becoming the direct driving force for policy adjustment.

However, the anticipated 50 basis point cut did not materialize. According to the voting results, Milan, who just assumed the role of governor on Tuesday, cast a dissenting vote, advocating for a 50 basis point cut, which aligned with market expectations of him as a "Trump mouthpiece." However, Waller and Bowman, who leaned towards an earlier rate cut in the July meeting, did not support a larger cut this time, which was seen as "not dovish enough." Waller is a popular candidate for the next Federal Reserve chair, and Bowman was also appointed by Trump. Their decisions maintained a "distance" from Milan, helping to alleviate market concerns about the Federal Reserve's independence.

Secondly, from the forward guidance perspective, the Federal Reserve may further cut rates within the year, but the path is unclear. The dot plot shows that officials' median forecast for the federal funds rate at the end of the year is 3.6%, corresponding to two more rate cuts. However, looking further, among the 19 officials who wrote down rate predictions, one advocated for a 125 basis point cut before the end of the year (considering that Milan supported a 50 basis point cut this time, this outlier may be Milan), while 9 believed in two more cuts, and another 9 thought there would only be one cut or no further cuts. In other words, if we exclude the extreme prediction of a 125 basis point cut, opinions among officials are almost evenly split. This suggests that the probability of one more cut before the end of the year is higher, while two cuts seem more like "flipping a coin."

Overall, the Federal Reserve's decision and forward guidance this time were relatively prudent. Despite significant internal disagreements and intense negotiations, Powell maintained a calm demeanor. Meanwhile, the Federal Reserve did not exhibit an overly stimulative attitude but continued to let data speak, which somewhat alleviated market concerns about its obedience to the president, helping to stabilize the market. Powell's performance at the press conference was also restrained and steady, demonstrating his efforts to showcase the Fed's independence and rationality Looking ahead, we expect that due to excessively weak employment data, the Federal Reserve may cut interest rates by another 25 basis points in October. However, after that, rising inflation may raise the threshold for further rate cuts, limiting the space for monetary easing.

We believe that the current issue in the U.S. economy lies not on the demand side, but on the supply side; the main problem is not insufficient demand, but rising costs. One piece of evidence is that while employment data has been weak, consumption remains resilient. If the weakness were due to demand, logically we should first see a cooling in consumption, which would then transmit to employment. However, the reality is the opposite: tariffs have raised corporate costs, forcing companies to reduce hiring, leading to a slowdown in employment, while consumption, as a lagging indicator of employment, has not yet been significantly impacted. Another observation is that while the growth rate of employment is declining, wage levels remain robust, and the unemployment rate has not risen sharply. This is due to tightened immigration policies leading to a decrease in labor supply, while tariff impacts have compressed labor demand, resulting in a dual effect. On a macro level, this manifests as a decline in total supply, while adjustments in total demand are relatively lagging, putting upward pressure on prices. A third observation is that enthusiasm in fields such as artificial intelligence (AI) and cryptocurrencies remains high, and there may already be signs of excessive optimism and over-investment in certain areas. This supports short-term demand but also means inflation faces upward pressure.

Excessive monetary easing not only fails to solve employment issues but may also exacerbate inflation, pushing the economy into a "stagflation-like" situation. We do not rule out the possibility that under the influence of tariffs and immigration policies, alongside the Federal Reserve's rate cuts, inflation continues to rise while employment recovers slowly, further forming a "stagflation-like" scenario. Of course, this situation will not be as severe as in the 1970s, but its long-term, structural, and hidden nature is equally concerning. Looking further ahead, against the backdrop of de-globalization and geopolitical economic competition, supply shocks may persist in the long term, potentially exacerbating economic cycles and market volatility, posing more challenges for monetary policy.

Chart 1: Federal Reserve's Economic Indicator Forecast (2025-09)

Source: Federal Reserve, CICC Research Department

Chart 2: Federal Reserve's September Dot Plot

Source: Federal Reserve, CICC Research Department

Chart 3: Comparison of Federal Reserve Monetary Policy Statements (September 2025 vs July 2025)

Source: Federal Reserve, CICC Research Department