According to the Zhito Finance APP, Sinolink released a Research Report stating that on December 18 local time, the Federal Reserve announced a reduction of the federal funds target rate Range by 25bps to 4.25%-4.50%, marking the third consecutive rate cut since September 2024. From March 2022 to July 2023, the Federal Reserve raised rates 11 times for a total of 525 basis points, and then kept the target Range unchanged for eight consecutive meetings. It is necessary to be wary of excessive trading based on a "hawkish" interest rate path guidance, as the risk of overseas economic slowdown still exists; however, it remains determined that the possibility of a "non-linear deterioration" of the USA economy has not diminished.

Sinolink Securities' main points are as follows:

The Federal Reserve's December 2024 meeting reduced the federal funds target rate Range by 25bps to 4.25%-4.50%, which is basically in line with market expectations; however, there was once again an "inconsistent" voting situation among the attendees.

Cleveland Fed President Hammack hopes to maintain the interest rate level unchanged. Previously, at the September meeting, Fed Governor Bowman favored a rate cut of 25bps, which was also inconsistent with the final decision for a 50bps cut. The statement from this meeting showed little overall change, and when considering the new adjustments to the federal funds rate target Range, it added "the extent and the timing".

More noteworthy is the significant change in the economic projections summary (SEP) updated at this meeting:

1) The dot plot shows that the median interest rate forecasts for the end of 2025/26/27 have been revised up from 3.4%/2.9%/2.9% in September to 3.9%/3.4%/3.1%. If calculated at a pace of 25bps per rate cut, the number of expected cuts next year is reduced from 4 to 2. In addition, the forecast for the neutral interest rate has been raised to 3% (this forecast has been revised upward in all four SEPs this year);

2) In terms of economic data, the forecast for real GDP growth rate in 2024/25 has been raised by 0.5pct/0.1pct to 2.5%/2.1%. The core PCE year-on-year forecast for 2024/25/26 has been raised by 0.2pct/0.3pct/0.2pct to 2.8%/2.5%/2.2%. The unemployment rate forecast for 2024/25 has been lowered by 0.2pct/0.1pct to 4.2%/4.4%.

The significant changes in the content of Powell's press conference speech are combined with the economic forecast summary.

The information containing a lot of incremental data is mainly focused on three aspects:

1) Interest rate path guidance: After the 100bps interest rate cut since September, the current policy stance has clearly reduced its "restrictiveness". Powell stated that we are now in a "new phase", and it is appropriate to proceed with caution, stressing that "progress on inflation" is one of the important prerequisites for continuing rate cuts.

2) Inflation: The weight of inflation in future rate decisions has been increased again, which may correspond to two layers of meaning. On one hand, it may imply that the Federal Reserve has begun to consider the "potential tariff impacts" of Trump's 2.0. Powell also mentioned that "some meeting members have started to incorporate the policy's impact on the economy into their forecasts". The bank's early estimates indicated that the comprehensive effects of Trump's policies could lead to inflation in the USA rising by 0.41%-0.69% in 2025. On the other hand, the stagnation in the "de-inflation" process has also drawn attention, as the core CPI month-on-month reading has remained around 0.3% since August, corresponding to a year-on-year growth rate of 3.3%, known as Powell's "moving sideways".

3) The impact of Trump's "tariff" policy: Powell pointed out that the Federal Reserve staff's analysis of "tariffs" in 2018 is a good starting point, corresponding to two potential responses from the Federal Reserve: one is to basically ignore the "temporary" impact of tariff increases on inflation, and the other is for decision-makers to react and change the interest rate path. However, it is too early to draw any conclusions due to the current limited understanding of the actual policies.

Aside from the three points mentioned above with significant incremental information, Powell's main description of the labor market has not changed much from before, acknowledging the current cooling of the labor market, but deeming it to be "gradual and orderly."

Considering that since the November meeting, the USA's growth remains resilient, inflation is showing a modest rebound, and the unemployment rate has risen but still remains lower than the September SEP forecast, coupled with the uncertainties regarding future policies since Trump's administration that may affect the Federal Reserve's interest rate path, this could be an important backdrop for this "hawkish" interest rate meeting. However, the bank still maintains the view that the possibility of the USA's economy experiencing "non-linear deterioration" has not diminished. On one hand, the unemployment rate of 4.246% in November is almost very close to the peak of 4.253% in July, and the latest initial claims numbers have also surprisingly risen back to 0.242 million people. On the other hand, the increasing marginal emphasis on inflation in rate decisions implicitly assumes that the labor market remains stable; if growth or employment deteriorates sharply, the Federal Reserve increasing the rate cut scale remains the baseline scenario.

Asset allocation suggestions

(1) Gold: Adjustments present allocation opportunities, with greater increases awaiting renewed overseas risks, continuing to benefit from the 'dual' drivers of falling real interest rates and a weaker dollar;

(2) Pharmaceuticals (especially Innovative Drugs): Under the Federal Reserve’s rate cut cycle, both A-shares and H-shares of Innovative Drugs have upward opportunities and potential for excess returns;

(3) US Treasuries: A high point followed by an allocation opportunity; the 4.5% yield on ten-year Treasuries remains close to the high levels during the rate hike cycle, possibly indicating that pricing related to Trump's presidency and strong growth is relatively complete, continuing to provide allocation opportunities at higher levels;

(4) US Stocks: If overseas risks rise again, compounded by some 'extreme' valuations and concentration levels, US stocks are likely to undergo adjustments.

Risk reminder: The risk of a second rebound in US inflation could lead to a Federal Reserve rate hike that exceeds expectations.