Cathay Securities and Haitong Securities: Under the "fog" of data, the Federal Reserve's divergence increases, expecting a preventive interest rate cut cycle to continue

According to the Zhitong Finance APP, Guotai Junan released a research report stating that the "fog" of data releases caused by the U.S. government shutdown, combined with the reality "fog" of economic and inflation trends, together constitute the source of divergence in the Federal Reserve's monetary policy path. The divergence in this monetary policy meeting and future interest rate cuts is increasing. After the meeting, the expectations for a rate cut in December have been adjusted downward compared to before the meeting. However, a preventive rate cut cycle is expected to continue, with U.S. Treasury yields slowing down, U.S. stocks remaining supported, the U.S. dollar index fluctuating upward, and the long-term bull market for gold still not over.

Guotai Junan's main points are as follows:

On October 29, 2025, Eastern Time, the Federal Reserve announced its interest rate decision, followed by Powell's routine press conference. From the interest rate decision and Powell's remarks, there are five main marginal changes: First, the Federal Reserve cut rates by 25 basis points as expected, but there were significant internal disagreements regarding this rate cut; Federal Reserve Governor Schmitt opposed it, advocating for maintaining rates, while Federal Reserve Governor Milan opposed it, advocating for a 50 basis point cut. Second, under the "fog" of data, Powell released greater uncertainty regarding the future rate cut path, increasing divergence in future monetary policy paths. Third, the Federal Reserve will stop balance sheet reduction on December 1 to ease the tightening of liquidity in the money market. Fourth, the Federal Reserve showed a more optimistic attitude towards the economy. Fifth, the Federal Reserve expressed greater confidence in controlling inflation.

Overall, the "fog" of data releases caused by the U.S. government shutdown, combined with the reality "fog" of economic and inflation trends, together constitute the source of divergence in the Federal Reserve's monetary policy path. The divergence in this monetary policy meeting and future rate cuts is increasing, and after the meeting, the expectations for a rate cut in December have been adjusted downward compared to before the meeting.

In the short term, Powell's remarks may disturb rate cut expectations, but under employment pressure, a rate cut is likely to continue within the year. The current logical basis for the Federal Reserve's rate cut is that the downward pressure on employment is greater than the upward pressure on inflation. The U.S. labor market has undergone long-term structural changes due to factors such as the expulsion of immigrants and the replacement by artificial intelligence, leading to phenomena such as an increase in the proportion of long-term unemployed among the total unemployed, a decrease in the proportion of immigrants in the labor market, and stabilization of average wages due to the exit of low-income workers from the market, reflecting that the decline in the labor market and its driving force on the economy is difficult to alleviate in the short term. Additionally, the U.S. government has been shut down for nearly a month; historically, the longest government shutdown in the U.S. lasted 35 days, and there are about 40 days until the next monetary policy meeting on December 10, during which new employment data may be released.

It is expected that major asset prices will continue to reflect the logic of the preventive rate cut cycle. Based on a review of major asset prices before and after historical preventive rate cuts, it is expected that U.S. Treasury yields will further decline after experiencing a rapid decline earlier, but the pace will slow down; U.S. stocks will continue to be supported, especially technology stocks and sectors sensitive to interest rates such as real estate, banking, and small-cap stocks; the U.S. dollar index is expected to first decline and then fluctuate; the long-term bull market for gold is still not over.

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