Recently, the global financial markets have been highly focused on the trajectory of the Federal Reserve's monetary policy. Following strong U.S. employment data for December 2024, the market anticipates that the Federal Reserve may slow down its rate cuts. However, December 2024's Consumer Price Index (CPI) data showed a slight rise in U.S. inflation, reigniting expectations for further rate cuts. Federal Reserve officials have emphasized that future monetary policy decisions will be based on economic data and the outlook for the economy.
Institutional analysts generally believe that the Federal Reserve will maintain the current interest rate unchanged at the January meeting, and the possibility of subsequent rate cuts remains uncertain. It is expected that the Federal Reserve will adopt a more cautious approach, continuing to rely on economic data to guide policy direction. Currently, it is difficult for the market to determine whether the peak of the dollar index and U.S. Treasury yields has been reached. In the short term, the strong dollar trend is likely to continue, and the current high U.S. Treasury yields may suppress the stock market.
Despite recent data indicating a cooling of U.S. core inflation, some institutions believe that U.S. inflation remains stubborn, with the risk of a rebound still present. Data from the U.S. Bureau of Labor Statistics showed that the December 2024 CPI rose by 0.4% month-on-month, far exceeding expectations. The core CPI, excluding volatile food and energy prices, increased by 3.2% year-on-year, still above the Federal Reserve's long-term target of 2%. Although some analysts predict that U.S. inflation will gradually decline, they also caution that removing inflationary pressures remains uncertain.
The Federal Reserve will hold its first monetary policy meeting of 2025 on January 28-29. Most analysts expect the Federal Reserve is likely to pause rate cuts and maintain the federal funds rate target range between 4.25% and 4.5%. New York Fed President Williams also mentioned in a speech that the current economic outlook remains full of uncertainty, and future policy will continue to adjust based on economic data.
Regarding the future monetary policy of the Federal Reserve, some analysts believe that the likelihood of a rate cut in the first quarter of 2025 is low. Although inflation has eased, the resilience of the U.S. economy remains strong. On the other hand, some analysts believe that if the Federal Reserve does not cut rates before the Jackson Hole Symposium in August, no rate cuts may be implemented throughout 2025.
In the asset market, strong employment data and policy uncertainty have impacted U.S. stock performance. A report from Goldman Sachs noted that although U.S. stocks have recently performed strongly, the market faces numerous risks that could lead to a significant pullback. On the other hand, UBS Wealth Management believes that despite the decline in rate cut expectations, there is still upward potential in the U.S. stock market due to the resilience of economic activity and further advancements in artificial intelligence.
Furthermore, the dollar index has recently performed strongly, once breaching 110, and may continue to remain strong in the short term. Analysts believe the dollar may experience high-level fluctuations, especially in the context of high U.S. Treasury yields, which could suppress stock market performance.
Overall, despite the strong performance of U.S. economic data in the short term, the Federal Reserve's monetary policy will remain cautious, with significant uncertainty surrounding future inflation trends and the pace of rate cuts.
