CICC: The Pace of Fed Rate Cuts May Shift Between "Fast-Slow-Fast"

CICC research report stated that our baseline expectation is that the Fed's rate-cutting cycle may be divided into three phases of "fast-slow-fast": The first phase is in Q4 2025, characterized by a relatively fast pace, potentially involving 3-4 consecutive rate cuts.

The first half of 2026 is the second phase, where the pace of rate cuts slows. As inflation continues to rise, the Fed may need to rebalance the risks between slowing growth and rising inflation, making sustained rapid rate cuts untenable. It might halt "balance sheet reduction" (quantitative tightening) to soothe financial markets.

The second half of the year is the third phase, where the pace of rate cuts accelerates again. Since Chair Powell's term expires in May 2026, we expect the Trump administration is highly likely to nominate a more dovish Fed Chair. Furthermore, the inflationary impact of tariffs may have largely run its course, potentially allowing the Fed to resume a faster rate-cutting pace.

In summary, we believe that Fed easing is the general trend over the next year. Easing trades will be the main theme in global markets, potentially driving US dollar depreciation and broadly benefiting various assets such as Chinese and global equities, bonds, commodities, and gold.