The Federal Reserve lowered interest rates as expected, raising the threshold for future easing; the French social security budget passed, but finances remain under pressure; CPI and PPI showed slight improvement, but price recovery still requires effort --- 1211 Macroeconomic Dehydration

The Federal Reserve lowered interest rates by 25 basis points as expected in December, bringing the federal funds rate down to 3.5%-3.75%. However, internal divisions have intensified, and the threshold for further easing in the future has been raised. It is expected that there will be two more rate cuts in 2026, but the pace may slow down, with the next rate cut possibly occurring in March next year. The French National Assembly passed the social security budget bill, which has undergone significant adjustments compared to the initial version, including the suspension of the 2023 pension reform, the cancellation of several social welfare expenditure control measures, and an increase in the medical expenditure growth target from 1.6% to 3%. It is expected that the social security deficit will decrease from €23 billion in 2025 to €19.7 billion in 2026. The French National Assembly passed the social security budget bill, which has undergone significant adjustments compared to the initial version, including the suspension of the 2023 pension reform, the cancellation of several social welfare expenditure control measures, and an increase in the medical expenditure growth target from 1.6% to 3%. It is expected that the social security deficit will decrease from €23 billion in 2025 to €19.7 billion in 2026. I. The Federal Reserve's Expected Rate Cut Raises Future Easing Threshold The Federal Reserve's Expected Rate Cut Raises Future Easing Threshold (CICC) CICC pointed out that the Federal Reserve lowered interest rates by 25 basis points as expected in December, bringing the federal funds rate down to 3.5%-3.75%. However, internal divisions have intensified, and the threshold for further easing in the future has been raised. It is expected that there will be two more rate cuts in 2026, but the pace may slow down, with the next rate cut possibly occurring in March next year. The Federal Reserve's 25 basis point rate cut in December meets market expectations, and further cuts may continue next year, but short-term resistance will increase. Among them, three officials held different views. Federal Reserve Governor Milan believed that a 50 basis point cut should be made, while Kansas City Fed President Schmid and Chicago Fed President Goolsbee believed that rates should remain unchanged. The number of those opposing the rate cut has increased to two, indicating that there is growing disagreement within the Federal Reserve on whether a rate cut is necessary. The market is concerned about whether the Federal Reserve can continue to cut rates in 2026. According to the latest dot plot, 12 officials believe that further rate cuts should continue, an increase of one from the last meeting, while seven officials prefer not to cut rates anymore, with three even predicting a shift towards rate hikes. The median of the dot plot still indicates one rate cut next year. The threshold for the next rate cut will be higher. Federal Reserve Chairman Powell mentioned that after the rate cut to 3.5%-3.75%, the federal funds rate has entered a broad estimate range of neutral rates, and the Federal Reserve will observe the subsequent economic trends and be ready to respond. Current inflation is mainly concentrated in tariffs, while inflation outside of tariffs remains moderate, and productivity improvements brought about by artificial intelligence also help to curb inflation The non-farm employment data from the past few months may have been overestimated, and the actual employment situation may be weaker. On the balance sheet front, the Federal Reserve will purchase short-term Treasury bills (T-bills) to maintain adequate reserves. This month, it will increase purchases by $40 billion, and will maintain a high scale in the coming months, with subsequent scales depending on market conditions. Powell pointed out that this is solely to support the effective implementation of monetary policy and the smooth operation of the market, unrelated to the stance of monetary policy. The sustained purchases over several months are to avoid excessive liquidity tightening during the tax payment period in April next year. The market believes that the re-expansion of the balance sheet helps prevent liquidity risks, interpreting it as dovish. The Federal Reserve is expected to cut interest rates twice in 2026, but at a slower pace, with the next cut possibly in March. The risks of supply contraction caused by tariffs and immigration policies are still accumulating, the growth rate of AI-related investments may slow down, and a slowdown in employment may drag down consumption, putting pressure on overall demand. II. French Social Security Budget Passed, Finances Still Under Pressure French Social Security Budget Passed, Finances Still Under Pressure (HSBC) HSBC pointed out that the French National Assembly has passed the social security budget, with significant adjustments from the initial version, including the suspension of the 2023 pension reform, the cancellation of multiple social welfare expenditure control measures, and an increase in the medical expenditure growth target from 1.6% to 3%. The social security deficit is expected to decrease from €23 billion in 2025 to €19.7 billion in 2026. The French National Assembly passed the social security budget with a narrow margin, 247 votes in favor to 234 against. The current bill particularly includes the suspension of the 2023 pension reform announced by Prime Minister Le Cornu in October. Several measures aimed at controlling social welfare expenditures have been canceled, such as freezing pensions and certain social welfare benefits, and reducing medical reimbursement amounts. The growth target for medical-related expenditures has also been raised from the initial version of 1.6% to a 3% annual growth rate. The passage of the social security budget marks a significant victory for the government led by Le Cornu, consolidating the Prime Minister's position. If the vote had failed, it would not only mean a setback for the social security budget but could also lead to the failure of the main budget proposal, triggering stronger demands from the opposition for a government reshuffle or new elections, resulting in a new political crisis. The passage of the social security budget aligns with expectations for significant fiscal expansion next year. The social security deficit is expected to decrease from €23 billion in 2025 to €19.7 billion in 2026. However, the initial version had a more significant reduction target of €17.5 billion. The reduction in the social security deficit includes €4.5 billion from national fiscal transfers, which is beneficial for the social security deficit but neutral for the public fiscal deficit It is expected that the fiscal deficit will reach 5.3% of GDP in 2026, far exceeding the government's target of 4.7%. III. CPI and PPI Slightly Rebound, but Price Recovery Still Needs Efforts CPI and PPI Slightly Rebound, but Price Recovery Still Needs Efforts (Huachuang) Huachuang pointed out that the CPI has rebounded year-on-year but declined month-on-month, mainly supported by seasonal increases in fresh vegetable prices, the transmission of international gold prices, and medical reform, while the decline in durable consumer goods prices and the drop in service prices during the off-peak travel season have created a drag. The PPI has slightly increased month-on-month for two consecutive months, driven mainly by the rebound in demand for energy such as coal and gas, while there are signs of marginal improvement in the prices of midstream equipment manufacturing. CPI has significantly rebounded year-on-year but declined month-on-month. In some regions, rainfall and temperature drops have affected the production and storage of fresh vegetables, leading to an increase in fresh vegetable prices, which has significantly boosted food prices compared to seasonal trends; influenced by the rise in international gold prices, domestic gold jewelry prices have increased; the impact of medical service price reform has continued to manifest, with prices rising for eight consecutive months. Prices of durable goods such as automobiles, home appliances, and mobile phones have decreased; alcohol prices have remained stable, weaker than seasonal trends; travel demand has entered the off-peak season, leading to a decline in prices for accommodation, air tickets, and other related services. PPI increased by 0.1% month-on-month, rising for two consecutive months. Seasonal increases in demand for industries such as coal and gas have driven their prices up. Input factors have led to a decline in prices in domestic oil-related industries and an increase in prices in non-ferrous related industries. There has been a marginal improvement in prices in key industries of midstream equipment manufacturing. Prices in the computer, communication, and electronics industries have risen; prices in the automotive manufacturing industry have narrowed their decline. In the second half of next year, the PPI of midstream industries (equipment manufacturing) is expected to stabilize. Based on experiences from 2015-2016 and 2019-2020, it takes about 6-7 quarters from the point when the supply growth rate of midstream industries first falls below the demand growth rate to when the midstream PPI prices stop declining and start to rebound. The upward risk of CPI may stem from improvements in service price increases. If next year's consumption subsidy policy expands to the service consumption sector, it may also lead to improvements in the price increase magnitude of services in competitive sectors. In the first 11 months of this year, the month-on-month increase in service prices in competitive sectors was 0.7%, compared to 0.8% for the entire last year, indicating a certain price increase space compared to pre-pandemic levels. Risk Warning and Disclaimer The market has risks, and investment should be cautious. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial conditions, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investment based on this is at their own risk