Guosheng Securities: The Federal Reserve's consecutive interest rate cuts in October and December are basically a foregone conclusion, and it is expected to cut rates 3 more times in 2026

Zhitong
2025.10.25 07:32
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Guosheng Securities released a research report stating that the Federal Reserve's interest rate cuts in October and December are almost certain, with an expectation of three more cuts in 2026, mainly concentrated in the first half of the year. The U.S. September CPI and core CPI both fell short of expectations, and the changes in interest rate cut expectations are minimal, which may lead to limited effects from the market's reasonable pricing of rate cuts. In the short term, there are downward risks to employment, and inflationary pressures are moderate, thus rate cuts are appropriate, but the room for cuts is limited

According to the Zhitong Finance APP, Guosheng Securities released a research report stating that the U.S. September CPI and core CPI were lower than expected. After the data was released, the expectations for the Federal Reserve's interest rate cuts changed little, with the implied probabilities of rate cuts in October and December both close to 100%. The Federal Reserve's rate cuts are focused on employment in the short term and inflation in the medium to long term, making consecutive rate cuts in October and December basically a foregone conclusion; based on an analysis of employment and real interest rates, it is expected that there may be three more rate cuts in 2026, mainly concentrated in the first half of the year. Currently, the market's expectations for rate cuts are reasonably priced, but this also means that if the rate cuts meet expectations, the effect will be limited, and if they fall short of expectations, it could cause market disturbances.

Event: At 20:30 Beijing time on October 24, the U.S. will announce the September 2025 CPI.

  1. The U.S. September CPI year-on-year was 3.0%, lower than the expected 3.1% and higher than the previous value of 2.9%, marking the highest since June last year; the core CPI year-on-year was 3.0%, lower than both the expected and previous values of 3.1%. In terms of components, only the energy component increased month-on-month, while food, core goods, and core services components all saw slight declines. The month-on-month "super core inflation" excluding food, energy, and housing was 0.11%, compared to 0.12% and 0.18% in August and July, respectively. Overall, U.S. inflation in September continues to show a "slow heating" state, with the impact of tariffs remaining mild.

  2. After the CPI announcement, U.S. stocks rose, while U.S. bonds and the dollar remained flat, with little change in rate cut expectations. The implied number of rate cuts in the interest rate futures for this year remains at two, with 25 basis points cuts expected in both October and December; the number of rate cuts expected before the end of 2026 is 4.7, indicating a high probability of three more cuts (totaling 75 basis points) in 2026.

  3. Guosheng Securities stated that in the short term, U.S. employment still faces downside risks, while inflationary pressures are temporarily mild, making consecutive rate cuts by the Federal Reserve appropriate; however, based on the lag effect of monetary policy, U.S. employment is nearing a bottoming recovery point, and the impact of tariffs on inflation will gradually become apparent, which limits the space for rate cuts. This can be understood as rate cuts being "front-loaded" rather than "increased." Based on calculations of real interest rates, the Federal Reserve may need to stop rate cuts after approximately 125 basis points.

  4. Guosheng Securities expects the Federal Reserve to cut rates by 25 basis points in both October and December, and to cut rates by 75 basis points in 2026, mainly concentrated in the first half of the year. The current pricing of the rate cut path in interest rate futures reflects this, indicating that asset prices in U.S. stocks, bonds, and currencies have already responded to the expected pace and magnitude of rate cuts. The market's "leading" of the Federal Reserve creates a "dilemma": first, even if rate cuts follow the market, the policy effect may still be limited; second, if the pace and magnitude of rate cuts are below market expectations, it may lead to disturbances in asset prices. Additionally, two points need to be noted: first, in May 2026, there will be a change in the Federal Reserve Chair, and the political inclination of the new chair may significantly impact the subsequent space for rate cuts. Second, Powell stated on October 15 that the Federal Reserve's quantitative tightening (balance sheet reduction) process may be nearing its end "in the coming months," and as the "discrepancy" in rate cuts decreases, changes in "quantity" may become more important for asset prices

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