On January 9th Eastern Standard Time, two high-ranking officials from the Federal Reserve spoke and signaled a "pause in rate cuts." Philadelphia Fed President Patrick Harker and Boston Fed President Susan Collins both stated that given the economic uncertainties, it is more appropriate to pause rate cuts and patiently observe data. This statement has drawn widespread market attention.
Harker: Policy Path Needs More Data Observation
Philadelphia Fed President Harker pointed out in his latest speech that although the Federal Reserve is still on a path of rate cuts, pausing policy adjustments at this stage is a wise move. He believes the Fed can maintain the current interest rate level for a while and decide its next steps based on economic data changes. He also emphasized that while the labor market is generally healthy, low-income groups face more pressure, and returning inflation to the 2% target may take longer.
Harker specifically mentioned that "the long-term trajectory of policy rates is still unclear, and caution is needed amidst uncertainty." He believes that the Fed will not change its rate control tools in the short term, while also being wary of potential threats to central bank independence.
Collins: Economic Policy Needs Patient Adjustment
Boston Fed President Collins expressed similar views in her speech on the same day. She pointed out that the U.S. economy is currently in good condition, but the pace of inflation decline may be slower than previously expected. Collins stressed that given that the economic trajectory may change due to new policies, the Fed needs greater flexibility in policy adjustments.
Collins also mentioned that the Fed's interest rate forecast in December last year indicated that there may only be two rate cuts in 2025, fewer than the previously expected four. She anticipates that the process of inflation decline will be bumpier, but good news on inflation might prompt the central bank to implement easing policies sooner.
Market Reaction: Repricing Rate Cut Expectations
The market reacted quickly to the Fed's policy signals. According to CME's "FedWatch" tool, the probability of maintaining rates unchanged in January is as high as 95.2%, and the probability remains at 62.8% for March. The market has repriced rate cut expectations, predicting only one 25 basis point cut in 2025.
Meanwhile, the U.S. bond market experienced a massive sell-off, with the 10-year Treasury yield momentarily surpassing the 4.7% mark, hitting a near two-year high. Goldman Sachs analysis suggests that the rapid rise in yields reflects market concerns about fiscal and inflation risks. Morgan Stanley's chief strategist also warns that the continued rise in bond yields could put more pressure on U.S. stock valuations, posing severe challenges in the next six months.
Policy Adjustments Still Require Caution
The next Fed meeting will be held from January 28th to 29th. Before that, U.S. employment and inflation data for December will be a crucial basis for influencing policy direction. Analysts generally believe that although the Fed has signaled a pause in rate cuts, the future monetary policy remains full of uncertainty. Further developments in economic data and the policy environment will determine the Fed's final choice.
