CICC: The expectation of interest rate cuts can only rely on the new chairman of the Federal Reserve?

At the January FOMC meeting that concluded early this morning Beijing time, the Federal Reserve held steady, maintaining the benchmark interest rate at 3.5% to 3.75%, in line with expectations. The December FOMC had already conveyed a clear signal of not wanting to lower interest rates further by modifying the wording of its statement. Subsequently, with the unemployment rate and inflation unexpectedly declining, the implied probability of no rate cut in January in CME interest rate futures had already reached 97% before the meeting, with the first rate cut of the year expected in June, remaining unchanged after the meeting. Chart: Before the meeting, the implied probability of no rate cut in January in CME interest rate futures had already reached 97%, with the first rate cut of the year expected in June. Source: CME, CICC Research Department Chart: The unchanged decision after the meeting maintains the expectation for the timing of the first rate cut of the year. Source: CME, CICC Research Department The market reacted mildly, with U.S. Treasury yields rising slightly, the U.S. stock market fluctuating and remaining flat, and the dollar strengthening after Bessenet stated that there was no intervention in the exchange rate and that the strong dollar policy would continue, while gold continued to rise significantly. We are not surprised by the outcome of this meeting, and the market's focus may not be on whether there will be a rate cut this time. It is important to note that under normal fundamental conditions, the Federal Reserve does not need to cut rates many times; it only needs to "take small steps" to balance the risks of growth and inflation. The three rate cuts expected in September to December 2024 and the three rate cuts in September to December 2025 are both in line with this. Therefore, the one-sided expectations of "no rate cuts" and "many rate cuts" are both undesirable. However, we are currently in a situation where, after a few rate cuts, economic data has shown some recovery, and we need to observe the upcoming points. (It is worth noting that even the U.S. real estate market has shown signs of recovery with rising volume and prices). This observation window allows Powell two more meetings (in March and April), unless a new chairman who "plays by different rules" is appointed or economic data suddenly changes drastically. However, the nomination of a new chairman has yet to be announced, so the market can only be "stuck" here, with the 10-year U.S. Treasury yield having been stuck in the 4.2% to 4.3% range for two months. Therefore, pausing rate cuts does not mean that further cuts cannot occur; rather, the fastest way to reignite easing expectations is through the nomination of a new chairman, while the counterforce to easing expectations is Trump's undermining of the Federal Reserve's independence, which is the current focus of the market Core Information from the Meeting: Pause on Interest Rate Cuts and Indication to Maintain Status Quo, Continuing Monthly Expansion of $40 Billion The interest rate cut is paused, maintaining the benchmark rate at 3.5% to 3.75%. Both the modifications in the meeting statement and Powell's remarks at the post-meeting press conference reflect a more positive assessment of the economic situation, removing indications of continued cooling in the labor market. Powell also stated that the economy is on a relatively good foundation (a ‘firm footing’). Therefore, the current interest rate level is generally "neutral" ("loosely neutral"), and there is no apparent contractionary stance in the short term. At this meeting, Miran and Waller voted against the rate cut, with fewer dissenting votes than the 3 votes in the December meeting. Growth recovery reduces the urgency for rate cuts, indicating a continued status quo. 1) The meeting statement adjusted the growth of economic activity from "moderate" to "solid," reflecting the Federal Reserve's acknowledgment of recent growth recovery, especially in traditional demand sensitive to interest rates, which has improved significantly since the rate cuts began in September 2025, such as in real estate and manufacturing PMI. The real estate sector has been the first to recover since July, benefiting from the warming expectations of rate cuts leading to a decline in U.S. Treasury rates, with lower financing costs driving an increase in both volume and price of existing home sales, reflecting improved demand in real estate. 2) Powell emphasized that the labor market has stabilized due to the past three rate cuts, with the unemployment rate showing some signs of stabilization; 3) The Fed maintains a wait-and-see attitude towards inflation, retaining the expression "remains somewhat elevated." Therefore, in the subsequent path of rate cuts, the Federal Reserve continues to use "extent and timing" and has removed the wording leaning towards risk (in light of the shift in the balance of risks), which is consistent with the Fed's statements from January to July 2025, where it maintained a status quo while still leaving room for rate cuts. Chart: Traditional demand sensitive to interest rates, such as manufacturing and real estate, has gradually improved since the rate cuts began in September 2025. Source: Haver, China International Capital Corporation Research Department Chart: U.S. existing home sales prices continue to rise. ![](https://mmbiz-qpic.wscn.net/sz_mmbiz_png/fzHRVN3sYsib6STtzZHIibKwZptV6gwribnohYgJJSiaHLYHg71YzSbiaGmJIpuBK3bAyiaynia9gVW3H61ytSKSSdUBQ/640? wx_fmt=png&from=appmsg) Source: Haver, China International Capital Corporation Research Department Chart: U.S. Existing Home Sales Reached Highest Level Since February 2023 in December Source: Haver, China International Capital Corporation Research Department Maintain a monthly expansion of $40 billion to improve financial liquidity. In December, the FOMC of the Federal Reserve decided to purchase $40 billion in short- and medium-term government bonds with maturities of three years or less in the first month, which significantly improved liquidity in the financial markets. The current ratio of reserves to bank assets rose to 12.4%, returning above the threshold of moderate abundance. The SOFR-OIS spread fell from a high of 14.4 at the end of November to the current 3.8. Restarting the expansion of the balance sheet helps to release liquidity, which is more beneficial for the financial markets and U.S. stocks. U.S. financial liquidity has expanded by 1.8% since early December (Federal Reserve balance sheet - TGA - reverse repos, approximately equal to commercial bank reserves). The Federal Reserve's decision to maintain a $40 billion expansion rate suggests that, based on the expansion and TGA decline rates, we estimate that U.S. financial liquidity is expected to expand by about 10% for the entire year of 2026. Historically, this has a direct uplifting effect on U.S. stocks, as historical data shows a significant positive correlation between the two. Chart: Current Ratio of Reserves to Bank Assets Rises to 12.4%, Returning Above the Threshold of Moderate Abundance Source: Bloomberg, China International Capital Corporation Research Department Chart: Overall U.S. Financial Liquidity May Further Expand, Expected to Increase by About 10% for the Entire Year of 2026 Source: Bloomberg, China International Capital Corporation Research Department Future Interest Rate Cut Path: The Federal Reserve Can Still Cut Rates, But Not Now; New Expectations Await New Chair Nomination From a fundamental perspective, the Federal Reserve still needs and can cut rates. 1) The need to cut rates arises because interest rates remain relatively high, with the real interest rate (1.9%) significantly above the natural interest rate (1.2%) that measures returns. Traditional demand is particularly evident, as the 30-year mortgage rate (6.09%) compares unfavorably to the rental yield (6.4%). After December, long-term U.S. Treasury yields remain high, exerting downward pressure on the briefly recovering real estate market, while the effective interest rate on commercial loans remains higher than the investment return rates in all sectors except information technology. 2) The ability to cut rates is supported by the fact that inflation is not a core constraint; we expect overall and core inflation to peak around the second quarter, with both CPI year-on-year and core CPI year-on-year at 3.0%, and the transmission of tariffs being slow and minimal. Chart: The 30-year mortgage rate remains above the rental yield from November 2024 to September 2025 Source: Haver, China International Capital Corporation Research Department Chart: The effective interest rate on commercial loans remains higher than the investment return rates in all sectors except information technology Source: Haver, Federal Reserve, FDIC, China International Capital Corporation Research Department Chart: We expect U.S. inflation to peak around the second quarter, with both CPI year-on-year and core CPI year-on-year at 3.0% Source: Haver, Federal Reserve, FDIC, China International Capital Corporation Research Department But not now, at least not so urgently for Powell. The Federal Reserve is not unaware of the situation above, but clearly after three consecutive rate cuts, it is no longer so pressing. The best strategy in the traditional framework or in Powell's eyes is to pause and observe, waiting until the economy deteriorates further before taking action, to avoid the risk of accelerating inflation by moving too quickly. This approach can be described as "orthodox" or even traditional, but it is also the most prudent. However, from Trump's perspective, it is too "conservative" and lacks foresight, which is the core contradiction between the two. Moreover, Trump has intensified pressure through two lawsuits targeting Lisa Cook and Powell himself, making it impossible for Powell to "yield" to political pressure on the surface. Therefore, in the two meetings before Powell's term ends in May, unless there is a drastic change in the economy, the probability of a rate cut is very low. In this situation, the fastest and best way to reignite easing expectations is to nominate a new chair, but undermining the independence of the Federal Reserve will only backfire. The nominated new chair can influence market expectations through statements without waiting for the official assumption of office in June, which is also the way the market is most willing to believe under the current framework. However, the nomination of the new chair has been "delayed again and again" since the end of last year, with no updates. On the contrary, during this period, Trump's continuous escalation of attacks on the independence of the Federal Reserve has not only been unhelpful but has also resulted in a significant backlash. The newly elected voting committee is relatively dovish. The 12 voting seats of the FOMC consist of two parts: 1) 8 fixed seats, 7 of which are appointed by the president as Federal Reserve governors and the president of the New York Fed; 2) 4 rotating seats, held by 11 regional Fed presidents on a one-year rotating basis, with the new term starting from this meeting. The new voting members joining in 2026 are Cleveland Fed President Beth Hammack, Philadelphia Fed President Anna Paulson, Dallas Fed President Lorie Logan, and Minneapolis Fed President Neel Kashkari. According to analyses from Bloomberg and ITC, Hammack and Logan are relatively hawkish, similar to the previous St. Louis Fed President Musalem and Kansas Fed President Schimid, Kashkari is neutral, but Paulson has recently expressed support for at least two rate cuts [1] (further adjustments). Overall, Paulson's dovish stance makes the policy inclination of the 2026 voting committee more accommodative compared to 2025. Chart: Paulson's dovish stance makes the policy inclination of the 2026 voting committee more accommodative compared to 2025. ![](https://mmbiz-qpic.wscn.net/sz_mmbiz_png/fzHRVN3sYsib6STtzZHIibKwZptV6gwribnMKN2auZibA7khCL8qjeV1Wsq9icsNF0xUJreClriaeluXHCUXWs8GtXDQ/640? wx_fmt=png&from=appmsg) Source: Bloomberg, China International Capital Corporation Research Department New Chairman Candidates and Process: Leading candidate Rieder supports more than two rate cuts, but delays in nominations and practices that undermine independence will have negative effects Based on the analysis above, the fastest and most effective way to inject easing expectations into the market is not to continuously undermine the independence of the Federal Reserve to make the market worry, but to influence rate cut expectations through the nomination of a new Federal Reserve chairman. If we purely consider the theoretical fundamental demand, another 1-2 cuts would suffice. As of the third quarter of 2025, the average natural interest rate in the U.S. is 1.2%, and the actual interest rate is 1.9%. Cutting rates 3-4 times could resolve the 70 basis point gap between the two. Including the 25 basis point cuts in October and December, another 1-2 cuts would bring the actual interest rate below the natural rate. Chart: The actual and natural interest rates differ by 70 basis points in the third quarter, with still 1-2 cuts available based on cuts in October and December. Source: Bloomberg, Federal Reserve, China International Capital Corporation Research Department Currently leading candidate Rieder supports more than two rate cuts. During the World Economic Forum in Davos, U.S. Treasury Secretary Basant stated, "The president may nominate a new Federal Reserve chairman as early as next week," which coincides with the expiration date of Milan's acting director's term (January 31). If Trump wants to nominate someone from outside the current board as the new chairman, he must first nominate them as a Federal Reserve governor. Polymarket data shows that as of January 27, Rieder leads with a 46% probability over Warsh's 29%. Compared to Hassett and Warsh, Rieder's policy stance is more dovish, stating in a January CNBC interview that "the Federal Reserve should cut rates at least twice, lowering the policy rate from the current 3.5-3.75% to 3%." Chart: As of January 27, Rieder has a 46% probability of winning, surpassing Warsh's 29%. Source: Polymarket, CICC Research Department Chart: Compared to Hassett and Walsh, who once had a leading probability of winning, Reid's policy stance is more dovish. Source: CNBC, CNN, CICC Research Department However, delaying nominations or actions that undermine the independence of the Federal Reserve will have negative effects. After the President nominates the Federal Reserve Chairman, the nominee must first pass the review of the Senate Banking Committee before entering a full vote. Recently, senior Republican member Tillis stated that he would oppose any Federal Reserve nominee, including the nomination of the Federal Reserve Chairman, "until Powell's legal issues are completely resolved." Given the current narrow party seat gap in the Senate Banking Committee (Republicans 13 votes vs. Democrats 11 votes), if Tillis votes against, it may hinder the nomination process, leading to the Senate's inability to confirm a new chairman before May, and even result in Powell potentially continuing to serve as acting chairman after voting on the Federal Reserve Board. Asset Implications? Trump's various actions since the beginning of the year have weakened repair expectations, focusing projections on the US dollar, US Treasuries, and gold. From the current interest rate cut expectations reflected in various assets for the next year, the ranking is: interest rate futures (2 times) > S&P 500 and dot plot (1 time) > Dow Jones (0.8 times) > copper and NASDAQ (0.7 times) > gold (0.4 times) > US Treasuries (0.3 times). This indicates that most assets are more hawkish than the Federal Reserve's dot plot, especially US Treasuries, which may rebound significantly if interest rate cut expectations return. Chart: The current ranking of interest rate cut expectations reflected in various assets is: interest rate futures (2 times) > S&P 500 and dot plot (1 time) > Dow Jones (0.8 times) > copper and NASDAQ (0.7 times) > gold (0.4 times) > US Treasuries (0.3 times). Source: Bloomberg, CME, CICC Research Department However, recent risk events are still fermenting, such as the "purchase" of Greenland, the Supreme Court's ruling on Trump's tariffs, Lisa Cook's dismissal ruling, and Powell's criminal investigation, all of which have delayed market expectations for "dual easing" in fiscal and monetary policy, and even intensified selling pressure on funds Concentrated projection on the US dollar and US Treasury bonds. Chart: Among major overseas holders of US Treasuries, China, Ireland, and India continue to reduce their holdings, while Japan, Belgium, and the UK increase theirs. Source: Wind, CICC Research Department Chart: When the Greenland incident impacted the market, there was a significant outflow from US stocks, but not from US Treasuries. Source: EPFR, CICC Research Department If the new chairman is successfully nominated and expectations for easing are reintroduced, it will still help provide repair momentum for traditional demand. At this time, long-term bonds have trading opportunities, and there are also catch-up opportunities for cyclical and small-cap stocks, similar to the performance since the end of last year. If this is combined with moderate fiscal easing and the continued trend in the technology industry, then the US credit cycle may continue to repair and even potentially overheat. At this time, the US dollar is unlikely to weaken significantly and may even rebound. Chart: The expected profit growth rate for 2026 is 12-14%, combined with a slight expansion in valuation to 23-24 times, corresponding to the S&P 7600-7800. Source: Bloomberg, FactSet, CICC Research Department Chart: If the Federal Reserve cuts interest rates 1-2 more times, we estimate the central tendency of the 10-year US Treasury yield to be 3.8-4%. Source: EPFR, China International Capital Corporation Research Department Chart: We estimate that the US dollar will not significantly weaken by 2026 Source: Bloomberg, China International Capital Corporation Research Department However, various actions by Trump since the beginning of the year have delayed or even weakened this expectation. For example, the delay in the Federal Reserve's nominations has increasingly undermined the independence of the Federal Reserve, and measures that escalate geopolitical tensions and tariffs have damaged market confidence in US dollar assets. These factors have been reflected in the recent performance of US Treasuries, the dollar, and gold. In a pessimistic scenario, if developments continue to exceed expectations, the aforementioned repair expectations will be postponed. We recommend: 1) Favoring safe-haven assets, such as gold; 2) Technology stocks, which may experience significant volatility in the short term, but their fundamental logic independent of policy fluctuations may present reallocation opportunities after the volatility; 3) Resource products, which are the "focus" of current trade frictions and geopolitical situations, will instead strengthen their investment value; 4) Avoiding US Treasuries, as the undermining of the Federal Reserve's independence, concerns about fiscal sustainability, and the narrative of "de-dollarization" will exert pressure. Chart: However, the undermining of the Federal Reserve's independence, concerns about fiscal sustainability, and the narrative of "de-dollarization" will put pressure on US Treasuries Source: Bloomberg, China International Capital Corporation Research Department This article is sourced from: CICC Insights 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 individual users' specific investment goals, financial conditions, or needs. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances Invest based on this information, and you bear the responsibility.