According to the Zhichun Finance APP, Huachuang Securities released a Research Report stating that in the December interest rate meeting, the Federal Reserve announced a 25 basis point rate cut, and the overnight reverse repos rate was lowered by 5 basis points. The latest dot plot shows that the Federal Reserve may reduce interest rates two times in 2025. The Federal Reserve raised its growth and inflation forecasts for the USA, with the expected GDP growth rate in 2025 revised up by 0.1% to 2.1%, and the core PCE forecast raised by 0.3% to 2.5%. In the interest rate meeting, Chairman Powell of the Federal Reserve pointed out that the federal funds rate is closer to the neutral rate, and recent inflation levels have not decreased as expected; a more evident progress in de-inflation is needed to continue cutting rates. In the outlook, a rate cut by the Federal Reserve may effectively stimulate economic growth and inflation pressures in the USA, with potential upward space for the dollar and US stocks, while Emerging Markets currencies and CSI Commodity Equity Index may have room for a corrective dip.

Main points from Huachuang Securities are as follows:

In December, the Federal Reserve announced a 25 basis point rate cut, lowering the federal funds rate Range from 4.5%-4.75% to 4.25%-4.5%, while also reducing the overnight reverse repos rate by 5 basis points, which is at the same level as the lower limit of the federal funds rate of 4.25%.

The latest dot plot shows that among the 19 members of the Federal Open Market Committee (FOMC), 14 believe that by the end of 2025, the median forecast for the federal funds rate will not be lower than 3.75%, which is an increase of 12 compared to September this year, corresponding to two rate cuts by the Federal Reserve in 2025; 12 expect that by the end of 2026, the median forecast for the federal funds rate will not be lower than 3.25%, which is an increase of 5 compared to September this year, also corresponding to two rate cuts for the entire year. The long-term median forecast for the federal funds rate, representing the neutral rate, rose from 2.9% to 3%, returning to the level of September 2018.

In addition, the Federal Reserve raised its growth and inflation forecasts for the USA and lowered its unemployment rate forecast. The median forecast for GDP growth in 2025 increased from 2% to 2.1%, while the forecast for GDP growth in 2026 remained at 2%; the median forecast for core PCE in 2025 increased from 2.2% to 2.5%, and for 2026 the median forecast for core PCE increased from 2% to 2.2%; the median forecast for the unemployment rate in 2025 decreased from 4.4% to 4.3%, and the median forecast for the unemployment rate in 2026 remained at 4.3%.

In Chairman Powell's speech, he first assessed the current state of the USA's economic fundamentals, concluding that the risks of inflation and economic growth faced by the USA are more balanced, which indicates a softening of the monetary policy stance focused on stabilizing growth since September; he then emphasized that recent inflation levels have decreased less than the Federal Reserve expected, requiring restrictive monetary policy to continue to apply pressure for downward inflation levels. Finally, he discussed that after cutting rates by 100 basis points, the Federal Reserve is now closer to the neutral rate level, which suggests that the timing for slowing the pace of rate cuts or even pausing rate cuts is approaching. These statements imply three key points for the future monetary policy of the Federal Reserve:

Firstly, the operational risk of monetary policy cannot be ignored—unlike the "more balanced" stance in the first half of this year and "gradual cooling" in September, the Federal Reserve has made a more positive determination regarding the USA job market, explicitly expressing the expectation to see the USA job market strengthen again in the future, which is reflected in the data adjustments of the economic forecast summary.

Comparing Powell's statements in September and December, it can be seen that under the data-dependent framework, the Federal Open Market Committee (FOMC) assigns completely different decision-making weights to inflation and economic growth data, making what seems to be an objective monetary policy formulation highly arbitrary. This not only weakens the sustainability of monetary policy itself, which fails to balance the dual goals of employment growth and price stability, but also derives operational risks of repeatedly fine-tuning monetary policy, amplifying fluctuations in financial market expectations and disrupting normal risk pricing.

Secondly, the simultaneous rise in both commodity consumption volume and price does not support a rate cut cycle—over the past two years, the main momentum driving down inflation in the USA has been commodity de-inflation. However, actual commodity consumption demand remains significantly higher than pre-pandemic levels; accurately, the decline in inflation elevates real interest rates and does not harm household real commodity consumption, with USA households' actual commodity consumption averaging 10% higher than before the pandemic since 2022. Due to the lowered real interest rates following rate cut expectations since November 2023, in the second half of 2024, both commodity (durable goods) prices and actual commodity consumption demand are expected to rebound significantly. The simultaneous rise in volume and price of commodity consumption indicates that the process of commodity de-inflation has ended, and the process of commodity re-inflation is gradually starting. Precisely against this backdrop, a significant rate cut by the Federal Reserve may not simply be a choice of whether to cut rates, but rather a need to reconsider whether the overall restrictive nature of monetary policy is adequate.

Thirdly, the elevation in the median prediction of neutral interest rates suggests normalization at high rates—at the December monetary policy meeting, the median forecast for neutral interest rates was raised from 2.9% to 3%, returning to the high level of September 2018. If the Federal Reserve's ultimate goal in cutting rates is to achieve neutral rates, there is a total of five potential rate cuts for the Federal Reserve from 2025 to 2027, averaging less than two cuts per year. Moreover, there is a possibility that if re-inflation risks increase, rate cuts in 2025 may be delayed until 2026, which fundamentally aligns with the conclusion of the report from June 2022: the normalization of high interest rate environments in the USA, due to fiscal stimulus repairing private sector balance sheets combined with insufficient tightening of monetary policy, has jointly led the USA economy's growth to shift from low inflation and low nominal growth to high inflation and high nominal growth.

From the perspective of major asset allocation: since September, the Federal Reserve's rate cuts have reached 100 basis points, and the USA economy has responded positively and relatively quickly. The Atlanta Fed's model indicates that the annualized quarterly USA real GDP may reach 3.2% in the fourth quarter, higher than the preliminary values of 2.8% for the third quarter and 3% for the second quarter. Additionally, USA economic leading indicators have risen year-on-year to -4.1%, reaching the highest point since October 2022, indicating that rate cut operations may greatly stimulate USA economic growth and continuously strengthen the labor market. The divergence in economic growth and monetary policy between the USA and other developed economies has room to widen again, which is beneficial for maintaining the strength of the USD and the US stock market, while preventing the decline of long-term US Treasury bond rates. If the Federal Reserve insists on its current stance, the yield curve of US Treasuries is likely to remain steeply bearish.

For Emerging Markets, the effective stimulation of USA economic growth and inflation pressures due to Federal Reserve rate cuts compresses the duration of the entire rate cut cycle, which is detrimental to improving investors' risk appetite towards Emerging Market assets. In other words, Emerging Market assets require a larger discount to become attractive. Coupled with the potential increase in new tariffs by Trump, Emerging Market currencies face considerable room for declining, which could potentially weaken the demand expectations for CSI Commodity Equity Index and amplify the downward pressure on commodity prices.

Risk Warning

The crude oil market has erupted into a price war, resulting in systemic financial risks in Emerging Markets.