CITIC Securities Co., Ltd.: FOMC divergences widen, Powell downplays December rate cut expectations

According to the Zhitong Finance APP, CITIC Securities has released a research report stating that the Federal Reserve is expected to cut interest rates by 25 basis points at the October 2025 meeting, in line with market expectations. Powell's assessment of the economic situation is similar to that in September, mentioning significant divergence within the FOMC regarding whether to continue cutting rates in December, indicating that a rate cut in December is not a "done deal." However, CITIC Securities believes that not cutting rates in December requires the U.S. government to return to normal operations and release economic data that does not support further rate cuts, which is a higher threshold than continuing to cut rates.

Additionally, CITIC Securities believes that among the 12 voting members for 2025, there are still more supporters for a rate cut in December, predicting that December may be a "close call" for a rate cut. The institution continues its previous view, expecting the Federal Reserve to cut rates by another 25 basis points at the next meeting. After Powell downplayed rate cut expectations, the U.S. dollar and Treasury yields rose, while U.S. stocks and gold faced some setbacks, with expectations that the market may continue to trade on the reduction of rate cut expectations in the short term.

CITIC Securities' main viewpoints are as follows:

Key points from the Federal Reserve's October 2025 meeting statement:

1. In terms of interest rate tools, the committee decided to cut rates by 25 basis points, lowering the target range for the federal funds rate to 3.75-4.00%, in line with market expectations. This rate decision did not receive unanimous consent, with temporary member Milan voting for a 50 basis point cut, while Kansas City Fed President George supported maintaining rates.

2. Regarding the balance sheet, the committee maintained the pace of balance sheet reduction, with a monthly redemption cap of $5 billion for U.S. Treasuries and $35 billion for agency debt and MBS, and announced that it would stop reducing the balance sheet starting December 1.

3. On the economic outlook, existing indicators suggest that economic activity is expanding at a moderate pace. Job growth has slowed this year, and the unemployment rate has slightly increased but remains low as of August; recent indicators are consistent with these trends. The inflation rate has risen since the beginning of the year and remains at a high level. The committee's goal is to achieve full employment and a 2% inflation rate in the long term. Uncertainty regarding the economic outlook remains high. The committee is closely monitoring the risks to its dual mandate and believes that the downside risks to employment have increased in recent months.

Changes in the Federal Reserve's October 2025 meeting statement compared to the previous meeting:

1. Changed "Recent indicators show that economic activity growth in the U.S. slowed in the first half of the year" to "Existing indicators suggest that economic activity is expanding at a moderate pace";

2. Replaced "Job growth has slowed, and the unemployment rate has slightly increased but remains low" with "Job growth has slowed this year, and the unemployment rate has slightly increased but remains low as of August; recent indicators are consistent with these trends";

3. Modified "The downside risks to employment have increased" to "The downside risks to employment have increased in recent months";

4. Overall, CITIC Securities believes that the October statement continues the "risk balance has changed" from September, still leaning towards controlling the downside risks in the U.S. labor market, with wording reflecting issues caused by the U.S. government shutdown leading to missing economic data Powell's assessment of the economic situation is similar to that in September, and there is significant disagreement within the FOMC regarding whether to continue cutting interest rates in December, stating that a rate cut in December is not a "foregone conclusion."

First, regarding the current economic situation, Powell's assessment is close to that of September, still expecting a slow cooling of the U.S. labor market, with inflation remaining high, but tariff-related inflation being a one-time issue (Powell indicated that the core PCE excluding tariffs is around 2.3-2.4%). Therefore, this rate cut is still a risk management cut.

Second, concerning the U.S. government shutdown and the current significant economic data gaps, Powell stated that the Federal Reserve is monitoring state-level initial unemployment claims data, PriceStats, and the Adobe Digital Price Index, as well as private sector wage data such as ADP. Additionally, Powell mentioned the Beige Book multiple times. The Beige Book from October 15 indicated that "overall economic activity has not changed much," "labor demand is generally weak across regions and industries," and "input costs have risen due to tariffs." The next Beige Book will be released on November 26, and if the U.S. government is still in a shutdown state and economic data remains lacking, the Beige Book is expected to have a significant impact.

Third, regarding AI, Powell stated that investments in AI-related data centers are not sensitive to interest rates, and the Federal Reserve's rate cuts have little impact on them. Powell compared the current AI wave to the tech bubble of the 1990s, noting that today's companies have revenue support. However, despite the rapid growth of AI investment, consumer spending remains more important for the overall U.S. economy.

Fourth, regarding QT, Powell stated that the balance sheet reduction will stop starting December 1, no longer rolling over agency securities, and will instead invest the returned funds into T-Bills, thereby making the Federal Reserve's balance sheet more biased towards U.S. Treasuries with a shorter duration (closer to the market's average duration).

Fifth, regarding whether to cut rates in December, this was the most notable question of the press conference. Powell mentioned that although there was support for a 50bps rate cut from Milan and Schmid supported no cut, this rate cut is not a "close call." However, there is significant disagreement within the FOMC regarding whether to cut rates in December, and a rate cut in December is not a "foregone conclusion." Powell attributed the disagreement to differing forecasts of economic trends and individual risk preferences within the FOMC. Additionally, Powell indicated that the government shutdown could also impact December, comparing the possibility of no rate cut in December to "driving in the fog" cautiously.

Powell stated that a rate cut in December is not a "foregone conclusion," but CITIC Securities believes that a rate cut in December requires the U.S. government to return to normal operations and release economic data that does not support further rate cuts, which is a higher threshold than continuing to cut rates. Furthermore, CITIC Securities believes that among the current 12 voting members for 2025, there are still more who support a rate cut in December, predicting that December may be a "close call" for a rate cut. CITIC Securities continues its previous view, expecting that the Federal Reserve will cut rates again by 25bps at the next meeting Since the September interest rate meeting, due to the U.S. government shutdown and the lack of economic data, the Federal Reserve's assessment of the economic situation has not changed, still leaning towards controlling the downside risks of the labor market. CITIC Securities believes that a pause in rate cuts in December requires the U.S. government to resume normal operations beforehand and to release inflation or employment data indicating that further rate cuts are inadvisable, which is a higher threshold than continuing rate cuts in December. Additionally, based on the specific voting patterns in the September dot plot, there was 1 vote for maintaining the interest rate at 4.25-4.50% for the year, 6 votes for maintaining the interest rate at 4.00-4.25% after the September rate cut, 2 votes for an additional 25bps cut after the September rate cut, 9 votes for an additional 50bps cut after the September rate cut, and 1 vote for the year-end interest rate target to be at 2.75-3%.

After the October interest rate meeting, based on the September dot plot, it is expected that Milan still supports a 50bps rate cut in December; 9 votes no longer support a rate cut in September, among which Beth Hammack, Lorie Logan, Raphael Bostic, and Thomas Barkin, four hawkish regional Fed presidents, do not have voting rights in 2025, thus CITIC Securities expects that there will be at most 5 votes against a rate cut in December. CITIC Securities anticipates that the committee members supporting another rate cut in December will include Powell, Waller, Bowman, Cook, Williams, and Philip Jefferson, with at least 6 votes. Therefore, CITIC Securities expects December to be a "close call" for a rate cut. CITIC Securities continues its previous view that the Federal Reserve will still cut rates by 25bps in December. In the market, according to CME, the market's expectation of a rate cut in December has decreased from 85.5% before the meeting to 68.4% after the meeting. After Powell downplayed the expectation of a rate cut in December, the U.S. dollar and U.S. Treasury yields rose, while U.S. stocks and gold were somewhat hindered. CITIC Securities expects that the market may continue to trade on the reduction of rate cut expectations in the short term.

Risk Factors:

U.S. inflation rebounds beyond expectations; U.S. labor market strengthens beyond expectations; Trump's tariff policy exceeds expectations