Under the Federal Reserve framework, the interest rate cut cycle remains unchanged: indicating that potential risks still exist

According to the Zhitong Finance APP, Guojin Securities released a strategy report stating that the Federal Reserve lowered interest rates by 25bps to 4.50%-4.75%, in line with market expectations. The meeting provided limited incremental information and did not change the rate-cutting cycle, emphasizing data-dependent decision-making. The U.S. economy appears resilient, but risks remain, necessitating close monitoring of labor market data. Recommended allocations include gold, pharmaceuticals (innovative drugs), U.S. Treasuries, and U.S. stocks, with gold and Treasuries requiring a wait for adjustment opportunities, innovative drugs benefiting from the rate-cutting cycle, and U.S. stocks potentially adjusting due to renewed economic risks.

The main points of the report are as follows:

On November 7 local time, the Federal Reserve announced a reduction of the federal funds target rate range by 25bps to 4.50%-4.75%, marking the second consecutive rate cut since September 2024. From March 2022 to July 2023, the Federal Reserve raised rates a total of 11 times, by 525 basis points, and then maintained the target rate range unchanged for eight consecutive meetings.

A bland meeting with limited incremental information, future focus on labor market data

The Federal Reserve's November 2024 meeting lowered the federal funds target rate range by 25bps to 4.50%-4.75%, consistent with market consensus expectations. The main changes in the statement from this meeting are as follows: 1) Slightly altered the wording describing the labor market, changing "job growth has slowed" to "labor market conditions have loosened since earlier this year"; 2) Removed the description from the September statement that "confidence in inflation returning to the 2% target has increased"; 3) All members unanimously agreed to cut rates by 25bp, whereas in the previous meeting, Federal Reserve Governor Bowman leaned towards a 25bp cut rather than a 50bp cut.

Based on the statement from this meeting and Powell's remarks at the press conference, the incremental information conveyed is quite limited. The Federal Reserve seems to be making every effort to avoid providing any clear signals regarding the future path of interest rates, continuing to emphasize that no pre-set course has been established and will adhere to its long-standing data-dependent decision-making model. Specifically, the key points to note are: 1) Inflation: Powell acknowledged that recent core inflation data is somewhat elevated, but one or two months of bad or good data will not change the narrative of "inflation trending downward." The removal of the description regarding "increased confidence in inflation returning to the 2% target" is not meant to express concerns about inflation stickiness; 2) Labor Market: A series of broad indicators suggest that the tightness of the labor market has returned to pre-pandemic levels, gradually cooling while still remaining in a relatively good position, which will not pose a source of inflationary pressure; 3) Impact of Trump's victory: In the short term, the new president will not have any impact on the Federal Reserve's decisions. The implementation of policies (such as tax reforms) requires congressional approval and other processes, at which point the Federal Reserve will incorporate the corresponding influencing factors into its forecasting model. Meanwhile, Powell emphasized the Federal Reserve's "political independence"; 4) Monetary Policy: The Federal Reserve believes that now is not a good time to provide clearer forward guidance, but even so, it acknowledged that after this rate cut, the monetary policy rate remains "restrictive," suggesting a continued push for future rate cuts Considering that since the September interest rate meeting, a series of data including employment, retail, and PMI have shown signs of marginal stabilization, corresponding to a phase of cooling overseas risks, and coinciding with the window before and after the U.S. elections, this may be an important background for this "mundane" interest rate meeting. The bank continues to maintain its judgment of "non-linear deterioration" in the U.S. economy. In fact, behind seemingly resilient overall data, risks still exist, such as significantly lower-than-expected job vacancies, an increase in layoffs, and potentially weak new employment data after excluding disturbances from hurricane strikes. These still point to a clear slowdown trend in the U.S. economy. Therefore, the bank advises to keep an eye on the median unemployment rate forecast of 4.4% given in the Fed's September SEP; once breached, it would mean that overseas risks will heat up again.

Allocation Suggestions: (1) Gold: In the short term, affected by the "Trump trade" realization, after adjustment, seize allocation opportunities, with greater gains awaiting the re-escalation of overseas risks. Historical patterns show that gold often faces pressure shortly after U.S. elections. This time, with historically high gold prices and the realization of the Trump trade, a pullback is inevitable, but after adjustment, it is a window for active positioning, with larger gains awaiting the renewed escalation of overseas risks. Gold will continue to benefit from the "dual" drivers of declining real interest rates and a weakening dollar; (2) Pharmaceuticals (especially innovative drugs): Benefiting from the Fed's rate-cutting cycle, both A-shares and Hong Kong stocks in innovative drugs have opportunities for price increases and excess returns; (3) U.S. Treasuries: After a rise, it presents an allocation opportunity. Powell mentioned in this meeting that the recent rise in U.S. Treasury yields is pricing in growth resilience. The bank believes that considering the onset of the rate-cutting cycle, a 4.5% yield on ten-year Treasuries is close to last year's level, which may mean that pricing for Trump's presidency and stronger growth is relatively sufficient in the short term, and further rises may provide allocation opportunities; (4) U.S. Stocks: If overseas economic risks heat up again, under the influence of "weak economy" expectations, U.S. stocks are likely to start adjusting again.

Risk Warning

The risk of a second rebound in U.S. inflation may lead the Fed to raise interest rates more than expected