Guosheng Securities: It is almost certain that the Federal Reserve will continue to cut interest rates in October and December. It is expected that there will be three more rate cuts in 2026.

Guosheng Securities released a research report stating that the US CPI and core CPI for September were lower than expected. After the data was released, there was little change in the market's expectations for a rate cut by the Federal Reserve, with the implied probability of rate cuts in October and December both close to 100% in interest rate futures. The Federal Reserve looks at short-term employment and long-term inflation, so consecutive rate cuts in October and December are almost certain. Based on the analysis of employment and real interest rates, it is expected that there will be three more rate cuts in 2026, mainly in the first half of the year. The current market's leading expectations for rate cuts are reasonable, but this also means that if the rate cut meets expectations, the effect may be limited, and if it falls short, it could cause market disruption. Event: On October 24th at 20:30 Beijing time, the US released the CPI for September 2025. 1. The US CPI for September increased by 3.0% year-on-year, lower than the expected 3.1% but higher than the previous value of 2.9%, the highest since June last year. The core CPI increased by 3.0% year-on-year, lower than the expected and previous values of 3.1%. In terms of categories, only the energy category saw a slight increase, while food, core goods, and core services all saw a small decrease. Excluding food, energy, and housing, the "super core inflation" increased by 0.11% month-on-month, compared to 0.12% in August and 0.18% in July. Overall, inflation in the US for September continues to be in a "slow heating" state, with the impact of tariffs still mild. 2. After the CPI was released, US stocks rose, while US bonds and the dollar remained steady, with little change in rate cut expectations. Interest rate futures imply two rate cuts within the year, in October and December, each by 25 basis points. By the end of 2026, the expected number of rate cuts is 4.7 times, with a high probability of another 3 rate cuts in 2026 (a total of 75 basis points). 3. Guosheng Securities stated that in the short term, the US employment still faces downward risks, while inflation pressure is currently moderate, making consecutive rate cuts by the Federal Reserve appropriate. However, according to the lag effects of monetary policy, US employment is nearing a turning point in bottoming out, and the impact of tariffs on inflation will gradually become more apparent. This determines that there is limited space for further rate cuts, and rate cuts can be viewed as "preliminary" rather than "additional measures." Based on calculations of real interest rates, the Federal Reserve may need to stop cutting rates after reducing by around 125 basis points. 4. Guosheng Securities predicts that the Federal Reserve will cut rates by 25 basis points each in October and December, another 75 basis points in 2026, mainly concentrated in the first half of the year. This is also reflected in the current pricing of interest rate futures, indicating that asset prices in the US stock, bond, and currency markets have already reacted to the expected pace and magnitude of rate cuts. This puts the market in a dilemma, where accompanying the rate cut may have limited policy effects, while a pace and magnitude of rate cuts below market expectations could lead to disruptions in asset prices. Additionally, two points to note are: firstly, in May 2026, there will be a change in leadership at the Federal Reserve, which may have a significant impact on the future rate cut space based on the political inclinations of the new chairperson. Secondly, on October 15th, Powell stated that the Federal Reserve's quantitative tightening (balance sheet reduction) process may be nearing its end in the "coming months," and as the "divergence" in rate cuts decreases, the changes in the balance sheet size may become more important for asset prices.