Powell's latest speech has released key signals, and market expectations have been affected again. Overall, the Federal Reserve has conveyed a mixed message of tight expectations and loose operations, which can be described as a coexistence of prudence and ease.
According to the latest dot plot released in December, most officials' median interest rate forecast for 2026 includes only one rate cut, with an amplitude of about 25 basis points. This means that the rate cut space for the whole year may be extremely limited, clearly lower than the previous optimistic expectations of the market, leaning towards a hawkish atmosphere. This aligns with our previous judgment — it is a typical hawkish rate cut, and market sentiment has adjusted accordingly.
On the other hand, the Federal Reserve has acted earlier and more robustly in terms of liquidity support. To stabilize the funding situation, starting this month, they will purchase about $40 billion of short-term government bonds each month to expand the balance sheet. This operation has come faster than expected, and its scale is also more significant. However, officials also explained that this is a technical arrangement to maintain liquidity stability, not a full restart of quantitative easing, so its macro effect should not be overly interpreted.
In summary, the recent rapid surge in the market may be the last wave of concentrated momentum release this year. The market may enter a slow adjustment and consolidation phase next, where volatility will test investors' patience and timing.
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