Zhongjin: The Federal Reserve has limited room to cut interest rates amid "stagflation"

The report from Zhongjin Research Institute stated that the Federal Reserve kept interest rates unchanged at its March meeting, in line with market expectations. The dot plot and economic forecasts show upward revisions in inflation expectations and a shrinking room for rate cuts, indicating an overall cautious policy stance. Despite Powell's belief in the uncertainty of oil price impacts and the resilience of the economy, we believe the actual situation is more complex. Tariffs and immigration policies have formed constraints on supply, combined with oil price shocks, the U.S. economy is entering a phase of "stagflation." At the same time, risks in private credit are emerging, and financial conditions may tighten spontaneously. In this context, the Federal Reserve may be constrained by sticky inflation in the short term and may continue to hold rates steady; in the medium term, with weakening demand or rising financial risks, there may be pressure for a passive shift towards rate cuts. We predict that the Federal Reserve will keep rates unchanged in the first half of the year, delaying a resumption of rate cuts until the second half. However, if rate cuts are a passive response to a deteriorating economic or financial environment, they may struggle to boost market risk appetite.