On November 7, local time in the United States, the Federal Reserve convened the Federal Open Market Committee (FOMC) interest rate meeting and announced that it would lower the federal funds Inrerest Rate target range by 25 basis points to a level between 4.50% and 4.75%. This interest rate meeting also took place on the second day after the historic US election.

For the subsequent policy pace, some analysts believe that the pace of rate cuts by the Federal Reserve is likely to slow down.

restrain interest rates by 25 basis points

On September 18, 2024, the Federal Reserve announced a 50 basis point cut in the federal funds Intrerest Rate target range to between 4.75% and 5.00%. This is the first rate cut by the Federal Reserve since March 2020.

This rate cut of 25 basis points is in line with market expectations. Prior to the announcement of the interest rate meeting statement on November 7th, UBS Wealth Management Investment Office predicted that the Fed would not immediately change its economic outlook. There is a high possibility that the Fed will cut rates by 25 basis points again at the meeting on November 7th.

After historically cutting interest rates by 50 basis points in September and ending the 30-month long tightening policy, the Federal Reserve unanimously decided in the November monetary policy meeting to once again lower the Benchmark Interest Rate by 25 basis points.

Wellington's vice president of investment and fixed income portfolio manager Johnny Yu told Economic Observer that the statement of this interest rate meeting is relatively unchanged from September, reiterating the commitment to 'achieve the 2% inflation target,' the Fed also restated its goal of 'achieving full employment,' while expressing concerns about the uncertainty of the economic outlook by removing the implication of 'more confidence that the inflation level will sustainably reach the target.'

Combining the speech of Fed Chairman Powell with the economic and market situation in the United States, Zhong Zhengsheng, Chief Economist of Ping An Securities, analyzed that the Fed's insistence on a 25 basis point rate cut can be understood from three aspects: First, although the employment and inflation data announced after the September interest rate meeting strengthened, it did not offset the previous cooling progress; second, the Fed hopes to maintain policy inertia as much as possible; third, the recent spontaneous rise in market interest rates further gives the Fed room for interest rate cuts.

Yu Jiayan believes that, overall, recent US employment reports and retail data have shown that the US economy has maintained a good momentum, indicating that the market's previous judgment of a hard landing for the US economy was overly pessimistic, and the expectation for the Fed to aggressively cut interest rates by 50 basis points to counter recession risks was also too radical. Under current economic conditions, the risk of secondary inflation cannot be underestimated. In fact, the core inflation level followed by the Fed has begun to stabilize and show signs of month-on-month recovery. At this time, it is necessary to maintain a restrained pace of interest rate cuts.

The future pace of interest rate cuts may slow down

The market has little disagreement on the 25 basis point rate cut by the Fed this time, but there are divergences on the rate cut space and pace in 2025.

Shenwan Hongyuan's chief economist Zhao Wei believes that the key is to follow the background of Trump's election victory and the Interest Rate guidance of the Federal Reserve. In summary, Powell still emphasizes the behavior pattern of being "data-dependent". Powell reiterated at the press conference that the pace of future rate cuts depends on the data. In the short term, the US election and Trump's policies have not yet affected the Fed's decision-making.

What is the outlook for the future pace of the Fed's policy? Zhang Jingjing, chief macro analyst at China Merchants Securities, believes that the probability of future rate cuts will slow down. She analyzed that Powell made every effort to maintain a neutral stance at this meeting, both rejecting forward guidance and maintaining data dependence, and not making too many comments on the election results and fiscal policy.

Therefore, Zhang Jingjing believes that there may be three important changes in the follow-up policies.

First, the future guides the end of the era. The first is that the government does not want to be "arbitraged" by the market, and the second is that the policy and economic uncertainty will be higher after the election, and the forward guidance is a more risk-neutral choice.

Second, the threshold for approaching the neutral Intrerest Rate may be raised. Powell has repeatedly emphasized that the approach to the neutral Intrerest Rate will be more cautious to achieve a dual risk balance, which also means that the threshold for subsequent interest rate cuts may be raised, just as Powell's metaphor "as we approach the established target, the operation rhythm will gradually slow down like a plane landing."

Third, the December interest rate meeting will release more signals. The parameters of the Fed model may undergo more changes and be reflected in the December dot plot.

Zhao Wei believes that the Fed's interest rate cut may present a rhythm of "75 basis points + 75 basis points", 75 basis points this year, which means that there is a possibility of a pause in interest rate cuts in December, and another 75 basis points next year. Considering next year's basic inflationary pressure and the implementation of Trump's policies, the pace of interest rate cuts may be more 'backward'.

Yu Jiayan also pointed out that the various uncertainties brought about by the change of government in the United States will bring a considerable degree of disturbance, including expansionary tax cuts and deficit-increasing plans, as well as a series of policy adjustments that may occur in the trade and diplomatic fields. These changes may exacerbate domestic and even global supply and demand imbalances, disrupt fragile inflation moderation processes, and raise the natural Intrerest Rate of the United States as well as the non-accelerating inflation unemployment rate, thereby constraining the space for future interest rate cuts.

Yu Jiayan said that it can be expected that the Federal Reserve may maintain a cautious and flexible policy stance in the next stage to deal with the risks of economic activity and inflation exceeding expectations. This also means that the market pricing logic based on the gradual slowdown of inflation and the accelerated relaxation of liquidity in the past period may reverse, leading to more differentiation and fluctuation in the performance of major asset classes, requiring close follow-up by market investors.

Next interest rate cut probability: 64.6% Magnitude: -0.25%
Interpretation
It is expected that the number of interest rate cuts within the year will be 1 time, and the year-end interest rate will be 4.25%-4.50%, with the next interest rate cut date on December 19, 2024.