Based on a comprehensive assessment of key factors, the Federal Reserve is likely to maintain stable interest rates in the short term, but from a full-year perspective, it still has the conditions and room to initiate a new round of easing within the year.

Currently, the external uncertainties facing the Federal Reserve are continuing to escalate. The military actions taken by the United States and Israel against Iran have directly pushed oil prices above the key $100 per barrel mark, and shipping in the Strait of Hormuz has come to a near standstill.

This typical geopolitical supply shock is significantly impacting the global inflation outlook through multiple pathways, including pushing up energy prices, reducing real income, and disrupting global supply chains.

Goldman Sachs analysts have explicitly warned that if geopolitical turmoil persists and oil prices remain above $100 per barrel, global inflation could rise by nearly one percentage point. The dramatic fluctuations in European natural gas prices, which once more doubled, further highlight the fragility of the energy market.

Former U.S. Treasury Secretary Janet Yellen has made a clear statement on this, pointing out that the conflict with Iran will make the Federal Reserve "more inclined to maintain the status quo and further discourage its willingness to cut interest rates."

Minneapolis Federal Reserve President Neal Kashkari also defined it as "a new disruptive factor that could impact the global economy."

Meanwhile, short-term fluctuations in U.S. domestic employment data have further complicated policy decisions. Data from the U.S. Bureau of Labor Statistics showed that non-farm payrolls fell by 92,000 in February, marking the third monthly decline in five months, and the unemployment rate rose slightly to 4.4%.

Data fluctuations do not indicate a trend reversal; structural problems are difficult to solve with monetary policy alone.

When interpreting the February non-farm payroll data, it is important to avoid falling into the trap of short-term fluctuations. A more reasonable interpretation is that the January data significantly overestimated the true momentum of the US economic fundamentals, while the February data is more of a rational correction of the previous overheated state, coupled with short-term disturbances caused by extreme weather factors, rather than a signal of a trend reversal in the job market.

It is worth noting that the core problem in the current US job market is not cyclical fluctuations, but rather structural issues that are difficult to resolve through monetary policy. On the one hand, federal government jobs have decreased by 330,000 since the peak in October 2024, a drop of 11%.

The IT industry lost another 11,000 jobs, continuing the trend of losing an average of 5,000 jobs per month. These job losses are essentially due to deliberate policy adjustments and the impact of technological iteration. Interest rate cuts cannot bring back laid-off federal government employees, nor can they restore jobs replaced by automation.

From a broader structural perspective, supply-side constraints in the US labor market continue to intensify.

The large-scale retirement of the baby boomer generation continues to reduce the total labor supply.

Immigration restrictions have further led to a significant shrinkage of the labor force. According to budget models from the Wharton School of the University of Pennsylvania, even a four-year immigration enforcement program would cause a 1% decline in GDP and an increase of $350 billion in the federal deficit.

The current effective tariff rate has soared by about five times compared to two years ago, and the resulting supply-side shock has not only pushed up consumer prices but also directly led to job losses.

In other words, the impact of AI, population aging, and the impact of reduced immigration on the labor market—these core structural variables are all completely outside the scope of the federal funds rate.

Inflationary pressures persist; interest rate cuts must be avoided to prevent expectations from spiraling out of control.

Regarding inflation, although the Federal Reserve faces demands for interest rate cuts, the current inflation situation has not progressed smoothly toward the policy target.

In 2025, the inflation rate of U.S. personal consumption expenditure (PCE) is projected to be 2.9%, nearly 1 percentage point higher than the Federal Reserve's policy target of 2%, while the core services inflation rate remains stuck at around 3.5%, showing significant stickiness.

Looking ahead, the continued effect of tariff shifting will further push up prices in the coming months, while the energy supply shock caused by the Iranian oil crisis will further exacerbate inflationary pressures.

However, there is also positive inflation expectations supporting the market: former Federal Reserve Governor Warsh explicitly advocated that the inflationary disturbances caused by tariffs should be eliminated, believing that the current trend of US productivity improvement will continue to suppress inflation. This view is highly consistent with the market's judgment that the Fed's easing cycle will continue.

For the Federal Reserve, the core risk of its current policy choices lies in the anchoring of inflation expectations.

Milton Friedman warned as early as 1968 that attempts to reduce the unemployment rate below the natural rate of unemployment through monetary stimulus would only lead to accelerated inflation, but would not achieve sustainable job growth.

As the historical experience of the Volcker era has shown, once inflation expectations de-anchor, re-anchoring will be a painful and lengthy process, especially during wartime. The liquidity released by interest rate cuts may not flow to where money is truly needed, but may instead drive up raw material and real estate prices due to speculation.

Therefore, although the Federal Reserve will continue to emphasize its vigilance against inflation risks, it will never make reactive policy adjustments, especially since the current policy interest rate is still in a tight range. A hasty rate cut would be tantamount to taking easing measures during an accelerating inflation cycle, which is a typical characteristic of policy mistakes.

Short-term policy remains unchanged; the logic for easing this year is becoming clearer.

Judging from multiple factors, the Federal Reserve is likely to remain on hold and keep interest rates unchanged until the second half of this year.

This policy choice is both a rational response to the current geopolitical uncertainties and persistent inflationary pressures, and a prudent consideration to avoid excessive policy adjustments that could trigger market volatility.

From a full-year perspective, the Federal Reserve still has clear room for easing, with three main supporting factors: First, the policy environment is becoming more relaxed.

The composition of the Federal Reserve Board of Governors will become more dovish in the second half of this year, and the overall stance of the seven permanent voting members of the Federal Open Market Committee (including current and prospective members) is more accommodative than the market median expectation. They generally believe that the neutral interest rate is close to 3% or lower, which opens up important policy space for interest rate cuts.

Secondly, the economic fundamentals support interest rate cuts. As the US GDP growth rate gradually slows down and commodity inflation continues to decline in the second half of the year, inflationary pressures will gradually ease, and the external conditions for interest rate cuts will be smoother.

Third, fiscal and policy objectives are geared towards easing. The current total U.S. federal debt (including implicit debt) has reached approximately $91.9 trillion, equivalent to 340% of GDP. A reasonable interest rate environment can help alleviate the heavy fiscal pressure, while the structural problems in the job market require a combination of easing policies and structural reforms to solve them.

Based on the above assessment, the Federal Reserve will begin a sustained interest rate cut cycle this year, eventually lowering the policy rate range to 3.00%-3.25%.

Summarize:

In addition to facing major problems such as a slowing domestic economy, sluggish employment, and rising inflation, the Federal Reserve is also affected by the war, making it difficult to adjust interest rates to achieve its goals. Therefore, it is currently difficult to use interest rate tools.

The domestic economy is slowing down, and employment issues are compounded by core problems such as an aging population and declining immigration. Interest rates are also difficult to address. Even if they are used, it will only be in the final stages of the war, after which GDP declines and inflation eases, and economic pressure will be alleviated by lowering interest rates. In the future, inflation after interest rate cuts will need to be addressed by increasing domestic production efficiency through AI and other means to provide more goods and services and eventually absorb the price increases.