Galaxy Securities December FOMC meeting review: interest rate cuts are moderate and internal differences widen

The Zhitong Finance App learned that China Galaxy Securities released comments from the December FOMC meeting. On December 11, the Federal Reserve lowered the benchmark interest rate by 25 basis points to 3.50%-3.75%, in line with market expectations, and has cut interest rates by a total of 75 basis points during the year. Since this interest rate cut has basically been priced, the focus of the market is not on interest rates themselves, but on Powell's wording bias, the policy path reflected in the bitmap, the extent of adjustments to economic forecasts, and whether asset purchase arrangements similar to QE will be initiated. Powell's statement at the press conference was generally moderate. Galaxy Securities mentioned that differences within the Federal Reserve have widened. The differences were reflected both in the resolution vote and in the bitmap.

The main views of China Galaxy Securities are as follows:

Interest rate cuts were priced in advance, and the market paid more attention to incremental information: On December 11, the Federal Reserve lowered the benchmark interest rate by 25 basis points to 3.50%-3.75%, in line with market expectations, and has cut interest rates by a total of 75 basis points during the year. Since this interest rate cut has basically been priced, the focus of the market is not on interest rates themselves, but on Powell's wording bias, the policy path reflected in the bitmap, the extent of adjustments to economic forecasts, and whether asset purchase arrangements similar to QE will be initiated.

Focus 1: The December statement emphasized the rise in unemployment. The overall assessment of the economy and inflation has not changed. It still indicates that economic activity is expanding at a moderate pace, and that inflation has rebounded since the beginning of the year and remains relatively high. The wording of the employment section has been adjusted to remove the previous description of “still low” (still low) and changed to “employment growth has slowed and the unemployment rate has risen slightly” (the weakening labor market resilience provides a direct reason for this interest rate cut. Furthermore, when discussing subsequent adjustments to the federal funds rate target range, the expression “extent and timing of the adjustment” was added.

Focus 2: In the December statement, it was announced that the table expansion will commence. The statement pointed out that the committee determined that the bank system's reserve balance had fallen to near an adequate level, so it will begin purchasing short-term treasury bonds as needed to maintain an adequate supply of reserves. In line with Powell's explanation at the press conference and the arrangement of the New York Federal Reserve's open market console, the Federal Reserve will purchase treasury notes with an initial scale of 40 billion US dollars starting in December, and is expected to maintain a high purchase scale for the next few months, then gradually decline. This operation is a reserve management purchase (RMP) under the maintenance reserve management framework, not quantitative easing (QE). At the same time, restrictions on the use of the Standing Repo Facilitator (Repo) have also been lifted, providing additional guarantees for short-term liquidity.

Focus 3: The differences within the Federal Reserve have widened. The differences were reflected both in the resolution vote and in the bitmap. (1) In terms of voting, 3 out of 12 voting committee members opposed cutting interest rates by 25 basis points. Stephen Milan advocated cutting interest rates by 50 basis points; Jeffrey Schmid and Austin Goulsby supported keeping interest rates unchanged. Among them, Goulsby joined the opposition for the first time. (2) In terms of the bitmap, the 19 members of the Federal Reserve are more scattered in their judgments on the 2026 interest rate path. Compared to September, those who think interest rates should be raised once increased from 2 to 3; those who think interest rates should be kept unchanged from 6 to 4; those who think interest rates should be cut once increased from 2 to 4; those who think interest rates should be cut twice remain the same; those who think interest rates should be cut 3 times were reduced from 3 to 2; those who thought interest rates should be cut four times were reduced from 2 to 1; another 1 person expected to cut interest rates six times (no one held this view in September).

Focus 4: The interest rate center on the December bitmap has not changed. The median expectations for the long-term federal funds rate at the end of 2025, 2026, 2027, and 2028 are 3.6%, 3.4%, 3.1%, 3.1%, and 3.0%, respectively, in line with September expectations.

Focus 5: In the December economic forecast, the GDP growth rate was raised, inflation expectations were lowered, and the unemployment rate was slightly adjusted. (1) The median GDP growth forecasts for the end of 2025, 2026, 2027, and 2028 (same below) were 1.7%, 2.3%, 2.0%, and 1.9%, respectively, up from 1.6%, 1.8%, 1.9%, and 1.8% in September. (2) Core PCE inflation expectations were 3.0%, 2.5%, 2.1%, and 2.0%, respectively, partially lower than 3.1%, 2.6%, 2.1%, and 2.0% in September. (3) PCE inflation expectations were 2.9%, 2.4%, 2.1%, and 2.0%, respectively, down from 3.0%, 2.6%, 2.1%, and 2.0% in September. (4) The unemployment rate is expected to be 4.5%, 4.4, 4.2%, and 4.2%, respectively. It was lowered from 4.3% to 4.2% in 2027 alone. The rest of the year was in line with the September forecast.

Focus 6: The December bitmap shows that there is only room left to cut interest rates once in 2026. The December bitmap shows that the Fed only reserves room for the 2026 interest rate cut once, and is expected to cut interest rates again in 2027. As of 6:00 Beijing time on the 11th, CME's market pricing still reflects the possibility of two interest rate cuts in 2026, 25 basis points each in April and September, respectively. There are no interest rate cuts scheduled in 2027. If there is no risk that the US labor market and economic data will decline beyond expectations, the judgment on cutting interest rates twice in 2026 will be maintained.

Focus 7: Powell's statement at the press conference was generally moderate. (1) Powell pointed out that employment growth has slowed significantly. It is estimated that employment has been overestimated by about 60,000 people a month in recent months, and actual employment growth may have turned negative. Households' perception of employment opportunities is declining, and the labor supply is falling sharply, stressing that policies must not continue to depress job creation. (2) Powell said that the core PCE was 2.8% year-on-year in the past 12 months, mainly reflecting a recovery in commodity inflation brought about by tariffs; if tariffs are excluded, inflation is around 2%, and it is determined that the tariff effect will peak around the first quarter of next year. (3) Powell clearly positioned the current interest rate level as being close to neutral. During the question and answer session, he stated that no one used interest rate hikes as a benchmark situation, and that the members mainly disagreed on whether to stop here or drop a little more.

Focus 8: In 2026, the Federal Reserve will face a change of local and chairman. (1) The current voting system consists of 7 directors, the governor of the New York Federal Reserve, and 4 rotating local governors. February 2026 will usher in a new round of annual rotation of local governors, including Anna Paulson of the Philadelphia Federal Reserve, Beth Hammark of the Cleveland Federal Reserve, Lori Logan of the Dallas Federal Reserve, and Neil Kashkari of the Minneapolis Federal Reserve. The current governors of Boston, Chicago, St. Louis, and Kansas City will be added to the FOMC voting list. (2) Federal Reserve Chairman Powell's term of office will officially end on May 15, 2026, and Trump has full nomination rights. If not re-nominated or confirmed by the Senate, he will step down as chairman, but can continue to serve as a board member until 2028. (3) Currently, the number of candidates for the Federal Reserve Chairman has been reduced to 5, namely current directors Bowman and Waller, White House National Economic Council Director Hassett, former director Walsh, and BlackRock's fixed income head Reed. According to Polymarket, Hassett's nomination probability is significantly ahead.

Focus 9: Popular candidate Hassett said there is still room to cut interest rates. (1) Judging from his academic background, he has a PhD in economics from the University of Pennsylvania, studied in Auerbach. He worked in the research department of the Federal Reserve Board and worked for a long time at the American Enterprise Research Institute, focusing on the fields of taxation, investment, and energy. He is an active supporter of supply-side tax cuts and market pricing mechanisms, and has no shortage of academic and technical qualifications. (2) Judging from the political background, he is the core executor of Trump's economics, presides over and vigorously enforces tax cuts, and attacks statistical agencies and the Federal Reserve in line with political narratives. (3) Since the chairman of the Federal Reserve does not have the power to veto a single vote, reshaping the FOMC requires a slow nomination and rotation mechanism. Even if Hassett takes office, he can only push for drastic interest rate cuts that Trump wants by persuading the board and the local Federal Reserve Chairman. There is still a gap between him and Greenspan and Powell in this regard. First, differences within the FOMC are already quite prominent. Second, it takes time to establish mutual trust and working relationships. Therefore, even if it enters the “Hassett era” in the short term, the Federal Reserve's policy orientation is more likely to be reflected in marginal bias, making it difficult to see an immediate drastic shift towards politicized easing.

Focus 10: Good for risky assets and gold, bad for the US dollar. (1) The US dollar index closed down 0.60% to 98.65; 10-year US Treasury yields fell 0.60% to 98.65; 10-year US Treasury yields fell 3.51 basis points to 4.149%; 2-year US Treasury yields fell 7.24 basis points to 3.538%; the NASDAQ index rose 0.33% and the S&P 500 rose 0.68%; spot gold closed up 0.48% to 4228.55 US dollars/ounce. (2) Looking ahead to 2026, against the backdrop of a simultaneous decline in nominal interest rates and inflation, the 10-year US Treasury yield is expected to fall to the 3.8% — 4.0% range; Japan's deterministic interest rate hike and the ECB end of the interest rate cut cycle will clearly weaken the dollar spread advantage, and the US dollar index is expected to drop to around 95; the COMEX gold futures target range may move up to 4300-4,500 US dollars/ounce; the overall easing environment will still support US stocks, but differentiation will intensify.

Risk warning: 1. The risk that the US labor market and economic data will fall beyond expectations; 2. The risk of unexpected liquidity problems in the US banking system; 3. The risk that Trump's policies exceed expectations and stimulate inflation