CICC: Fed rate hikes not over, but no need to rush

CICC: Fed rate hikes not over, but no need to rush CICC released a research report stating that the Fed held rates steady in October, with policymakers maintaining a firm anti-inflation stance but also believing policy can afford to be patient. Some hawkish officials shifted to a wait-and-see approach, indicating reduced urgency for consecutive rate hikes. Since the September hike, US financial conditions have tightened marginally and the inflation premium has declined somewhat, allowing the Fed to wait for policy effects to further materialize. Looking ahead, CICC expects one more hike in December, followed by continued wait-and-see. This hiking cycle is more likely to be a mild, gradual adjustment rather than aggressive tightening. In addition, Warsh announced a reduction in the frequency of rate votes starting next year, with some meetings dedicated to discussing long-term monetary policy strategya continuation of his push to reform the Fed's policy framework since taking office. For markets, the risk of the Fed tightening more than expected has declined in the short term, while the medium-term monetary stance will remain relatively tight. CICC's main points are as follows: The Fed's October meeting kept the policy rate unchanged at 3.75%4.0%, in line with market expectations. The decision passed 102, with Cleveland Fed President Hammack and Fed Governor Cook dissenting in favor of a 25bp hike. CICC believes the core signal from this meeting is: the anti-inflation task is not over, but monetary policy can remain patient. The Fed has not changed its anti-inflation stance; rather, after the September hike, it chose to observe the effects of prior tightening before deciding on next steps. This is neither a dovish pivot nor a sign that the Fed is behind the curve, but rather a shift toward a more prudent approach to monetary policy. First, the anti-inflation stance remains firm. The monetary policy statement noted that US economic activity expanded at a "strong" pace (the previous meeting's wording was "solid"), but inflation remains elevated. The Fed will remain firmly committed to achieving its 2% inflation targetthis commitment is unshaken. However, judging from the vote, some hawkish officials have shifted to wait-and-see. Dallas Fed President Logan and Minneapolis Fed President Kashkari, who had supported hikes since July, did not vote for a hike at this meeting. This shows that even within the hawkish camp, there is disagreement over whether another immediate hike is needed. At the same time, the policy statement emphasized that "the accumulation of more information will help the Committee determine the appropriate policy stance." This indicates the Fed wants more data support before taking its next step. Second, the September hike has already had some effect, and the Fed can wait for tightening effects to further materialize. Warsh noted at the press conference that since the September hike, US credit spreads have widened somewhat and financial conditions have tightened marginally, while the inflation risk premium has declinedeven with higher oil prices, Treasury yields have not risen significantly. This shows that prior policy actions have already worked through financial markets. Given the lag in monetary policy transmission, the Fed has reason to pause and observe. Third, the Fed has already demonstrated policy independence through actual actions and does not need to further reinforce policy credibility. Before the September meeting, markets had some doubts about the Fed's and Warsh's own resolve to fight inflation, but after the September hike, this concern has clearly eased. Although the Fed held steady at this meeting, two officials still voted for a hike. This shows that even with midterm elections approaching, some officials remain committed to making judgments based on economic and inflation conditions rather than catering to political cycles. This signal also helps consolidate the Fed's credibility. Warsh's remarks on US productivity prospects are also noteworthy. He noted that US real GDP growth for the first half of this year has been revised up from 1.8% to 2.4%, third-quarter GDP growth may accelerate further, and signs of productivity improvement are beginning to appear in the economy. This judgment has important implications: if strong economic performance stems from productivity gains and a rising potential growth rate, then faster GDP growth does not necessarily mean the economy is overheating or that inflation pressures are rising sharply, and the Fed may not need consecutive rate hikes. In addition, the meeting mechanism adjustment is another step in Warsh's reform push. Warsh announced changes to the FOMC meeting schedule: in 2027, eight meetings per year will be maintained, but one will be dedicated to discussing long-term monetary policy strategy without rate votes or policy statements; in 2028, the plan is to increase to two strategy meetings, with rate decision meetings reduced to six. This adjustment continues Warsh's reform approach to the Fed's policymaking and communication since taking office, aiming to preserve more discussion space for medium- and long-term issues such as economic structural changes, productivity, and the monetary policy framework. A lower frequency of rate votes also means policy decisions will be built on more thorough information accumulation. CICC believes the Fed's current policy stance is broadly appropriateneither clearly behind the inflation curve nor excessively tight. CICC's baseline scenario is one more hike in December, followed by continued wait-and-see. Overall, this hiking cycle is more likely to be a mild, gradual adjustment rather than a storm-like tightening cycle. Further hikes, if any, will likely be based on solid US economic fundamentals and may not trigger a significant slowdown in aggregate demand. For capital markets, the risk of the Fed tightening more than expected may decline in the short term. Even if upcoming economic data remain strong, it would only prove the Fed needs to hike again in Decemberwhich is already within market expectations. In the medium term, the US economy remains in an upcycle with solid growth momentum. CICC believes this means the Fed will most likely maintain a relatively tight monetary stance over the next six months, with a low probability of shifting to easing.