Author: Guo Jiayi, Zhang Juntao; Source: Xingye Research

In the early morning of March 20, Beijing time, the Federal Reserve announced the results of the March interest rate meeting, maintaining the 4.5% interest rate upper limit as scheduled, slowing down the Treasury bond QT, and Waller opposes slowing down the balance sheet. After the results were announced, the daily gains of the US dollar index narrowed, the yield on US bonds fell, US stocks rose, and gold continued to hit a record high. The market's expectations for the Fed's interest rate cut in 2025 are stable at 2 to 3 times (50 to 75bp).

There is only one obvious change in the statement of this interest rate meeting, deleting "the rough balance of risks to achieve employment and inflation targets" and changing it to "increased uncertainty in the economic outlook." Since April, the monthly reduction ceiling for U.S. Treasury bonds has been lowered from $25 billion to $5 billion. Institutional bonds and MBS cuts a single-month cap of $35 billion remain unchanged. The quarterly economic forecast has revised its economic growth forecast for three consecutive years, raising the unemployment rate this year by 0.1%, and 0.2% and 0.3% respectively to reflect the risk of stagflation caused by tariffs. The center of the dot map has not changed, and the members' expectations are concentrated on a rate cut of 1 to 2 times (25 to 50bp), which is closer to market expectations.

The Federal Reserve emphasized inflation uncertainty, but showed calmness in the recent rebound in inflation expectations and the decline in some economic data. Considering that the Fed's decision-making style tends to make a judgment after seeing the economic data, and the inflation data released in April and May are likely to cool down, it is expected that it is very likely to fulfill market expectations for a interest rate cut in June. There is a high risk of inflation rebounding in the second half of the year, and there is great uncertainty as to whether interest rates can be cut again after June.

In the context of continued expansion of US debt and sluggish demand for overseas investors, the Fed's slowdown or stopping balance sheet shrinking is limited in its benefit to US debt. The maturity premium for US Treasury is still on the upward channel this year.

Event: The Federal Reserve held steady as scheduled

In the early morning of March 20, Beijing time, the Federal Reserve announced the results of the March interest rate meeting, and remained unchanged as scheduled. The target interest rate limit for federal funds remained at 4.5%, slowing down the pace of Treasury bond QT but maintaining the MBS share reduction ceiling. After the results of the interest rate meeting were announced, the gains of the US dollar index narrowed in the day, the yield of US bonds fell, US stocks rose, gold continued to hit a record high, and USDCNH fell below 7.23 in the night trading. The USDCNY mid-price on the 20th was 7.1754, adjusting 56pips (the direction of RMB depreciation) from the previous trading day. The market's expectations for the Fed's interest rate cut in 2025 are stable at 2 to 3 times (50 to 75bp).

1. Key points of the Federal Reserve's interest rate meeting

The wording of the statement of this interest rate meeting was only obvious, and the removal of "the rough balance of risks to achieve employment and inflation targets" was changed to "the increase in uncertainty in the economic outlook." However, at the press conference, Federal Reserve Chairman Powell said that there is no need to over-interpret the revision. The Federal Reserve announced that the monthly reduction ceiling for U.S. Treasury bonds will be reduced from $25 billion to $5 billion since April. Institutional bonds and MBS cuts a monthly cap of $35 billion remains unchanged (committed to no longerHolding, keeping the target unchanged, the actual reduction rate is about US$15-20 billion per month). Director Waller voted against it, and she supported the interest rate to remain unchanged but opposed slowing down the balance sheet. The quarterly economic forecast has revised down three years of economic growth expectations, raising the unemployment rate this year by 0.1%, and raising the PCE and core PCE expectations by 0.2% and 0.3% respectively. To a certain extent, it reflects the recent weakening of some economic data and the short-term impact of Trump's economy. The center of the dot map has not changed. The members' expectations are concentrated on a rate cut of 1 to 2 times (25 to 50bp), which is closer to market expectations.

Main content of the press conference:

About the economic recession: External economists' expectations for the US economic recession have increased, but the absolute level is not high. Powell believes that a recession is unlikely. Although some survey data show significant increases in uncertainty and downside risks, hard data remains robust. Survey data and hard data are not always closely linked.

About inflation: A considerable part of the higher inflation expectations come from tariffs, especially pushing up short-term inflation expectations. We are working to divest nontariff inflation. It is getting closer to the goal of price stability, but tariffs may slow the process. When asked whether it was back to the judgment that "inflation is temporary", Powell said it was difficult to judge whether it was "temporary" in the face of tariff inflation.

About interest rates: If the economy is performing soundly, the Fed is happy to maintain higher for longer. Keep paying close attention to economic data, the right way to do it is to continue to wait until the economic situation becomes clearer.

2. Highly likely to fulfill the expectations of interest rate cuts in June

The inflation uncertainty brought by current tariffs, etc. is the main potential factor restricting the Federal Reserve from further interest rate cuts. Inflation expectations have recently been investigated, which have seen a significant rebound, and the rebound not only exists in short-term expectations, but also in five or ten years long-term expectations. However, the inflation expectations indicator built by the Federal Reserve is quarterly data and has lag. It has only been updated to the fourth quarter of 2024, and the data is still stable. This may also be the reason why Powell is vague about inflation expectations. The decision-making style of this year's Federal Reserve tends to make judgments after seeing economic data, rather than being ahead of adjustments to economic data. Considering that the inflation data released in April and May are likely to cool down, the Federal Reserve has a high probability of fulfilling market expectations for a rate cut in June. Judging from the short-cycle indicators we have built, the Fed rate cut window is still open (indicator reading <1). There is a high risk of inflation rebound in the second half of the year, and there will be recurring expectations for interest rate cuts this year. There is great uncertainty as to whether interest rate cuts can be cut again in June.

3. Slowing down balance sheets has limited benefits for US bonds!

In January this year, we have already said, "Can the Federal Reserve end the balance sheet shrinking lower the maturity premium?--The US Treasury Monthly Report Second in 2025"In the period, the Federal Reserve is likely to stop reducing its balance sheet in the first half of this year. The monthly reduction limit of US Treasury in April fell to US$5 billion, and the actual effect is very close to stopping the balance sheet. However, due to the continued growth of US debt regulations, the proportion of US Treasury held by the Federal Reserve is still on a decline channel, and the term premium is likely to remain on an upward channel during the year. In addition, after 2020, the market's attention to US fiscal deficitization has increased, and the term premium is highly positively correlated with the US leverage ratio. Currently, the CBO predicts that the US leverage ratio will continue to rise, and it also supports the upward trend of term premium. In summary, the actual benefits of the Federal Reserve's slowdown or stopping of balance sheet shrinkage on US Treasury are limited.