CICC: It is expected that the Federal Reserve will cut interest rates twice in 2026, but the pace of rate cuts is slowing down.

Zhongjin released a research report stating that the Federal Reserve is expected to cut interest rates by 25 basis points at the December meeting as expected, but the number of officials opposing the rate cut has increased to two, indicating that the threshold for further rate cuts is rising. At the same time, Powell's statements are not strong, and the Federal Reserve has announced that it will start purchasing short-term Treasury bills (T-bills) to help ease market concerns. The reversal of the previously fully priced-in "hawkish rate cut" expectation has exacerbated market volatility. Looking ahead, considering that the economy and employment are still facing downward pressure, the bank expects the Federal Reserve to continue cutting interest rates in 2026, but the pace of rate cuts is slowing down. There may be no action in January, and the next rate cut may be in March. Key points from Zhongjin: The Federal Reserve cut interest rates as scheduled, with two officials opposing the rate cut. As expected by the market, the Federal Reserve cut interest rates by 25 basis points in December. This decision was not unanimous, as three officials expressed different opinions. Kansas Fed President Esther George and Chicago Fed President Charles Evans believed that the Fed should stand pat, while Fed Governor Luke Raven continued to believe that the Fed should cut rates by 50 basis points. Compared to the previous meeting, the number of people who believe that interest rates should not be cut further has increased to two. This indicates that there is increasing dissent within the Federal Reserve on the need for rate cuts. Rate cuts may continue next year, but short-term resistance will increase. Looking ahead, the real concern for the market is whether the Federal Reserve can continue cutting interest rates in 2026. According to the latest dot plot, a total of 12 officials believe that rate cuts should continue, an increase of 1 person from the previous meeting, while 7 officials tend to no longer cut rates, with 3 of them even predicting a shift to raising rates. This makes the number of rate cuts indicated by the dot plot next year still one, consistent with the previous meeting. When responding to questions from reporters about whether they would "pause rate cuts," Federal Reserve Chairman Jerome Powell stated that after this rate cut to 3.5%-3.75%, the federal funds rate has entered a broad range of estimates of the neutral interest rate, and the Federal Reserve will wait and see the subsequent economic trends and respond as necessary. In other words, although the U.S. labor market has continued to slow down since the last meeting, officials do not seem to be eager to implement more easing measures. This means that the threshold for the next rate cut will be higher. There may be two reasons behind this: first, the latest inflation data remains stubborn and has not converged towards the Fed's 2% target. Second, these officials believe that economic growth next year may rebound from this year, so there may not be a need for excessive monetary easing. Previously published economic forecasts show that the GDP growth forecast for 2026 has been raised from 1.7% at the previous meeting to 2.3%. However, Powell downplayed these views at the press conference, stating that current inflation is mainly focused in the area of tariffs, and inflation outside of tariffs remains moderate; the rebound in economic growth next year is mainly due to the slowdown in economic activity caused by the government shutdown in the fourth quarter, and this growth will be compensated for in the first quarter of next year. He also mentioned that the nonfarm payroll data from the past few months may have been overestimated, and the actual employment situation may be weaker, while the productivity gains from artificial intelligence also help suppress inflation. Overall, Powell's attitude is not hawkish, which helps ease market concerns. In terms of the balance sheet, the Federal Reserve has also made adjustments: to maintain ample reserves, the Federal Reserve will start purchasing short-term Treasury bills (T-bills), with an additional $40 billion in purchases this month, and will maintain a higher scale in the coming months, with the size to be reduced based on market conditions later. Powell stated that this operation is only to support the effective implementation of monetary policy and the smooth functioning of the market, not related to the monetary policy stance, and maintaining purchases for several months is to avoid excessive liquidity tension during the tax payment period in April next year. Nevertheless, expanding the balance sheet again helps prevent liquidity risks, which the market interprets as dovish. Risk assets generally rose after the interest rate decision was announced, U.S. bond yields fell, and the U.S. dollar weakened. One explanation is that the market had already priced in a "hawkish rate cut" before the meeting, and Powell's stance today was not hawkish enough, coupled with the Federal Reserve's balance sheet expansion, leading to a reversal of expectations. Regarding the future interest rate path, the bank maintains its previous judgment that the Federal Reserve may cut interest rates twice in 2026, but the pace is slowing down, with no action in January and the next rate cut possibly in March. Continued rate cuts are due to ongoing pressure on economic growth. On the one hand, risks of supply contraction due to tariffs and immigration policies are still accumulating; on the other hand, the growth rate of investments related to artificial intelligence may slow down, and a slowdown in employment could drag down consumption, putting pressure on total demand. In this context, if further rate cuts reflect a decline in confidence in the economic outlook, its support for the market may not be significant.