Questions about the Federal Reserve’s independence amid market optimism and interest rate cut expectations

Asian market conditions

On Tuesday, the U.S. dollar index rebounded, hitting a new high in more than two weeks. As of now, the U.S. dollar is quoted at 98.55.

Geopolitical dynamics:

The situation in Venezuela is developing on multiple fronts: ① The Venezuelan government is negotiating with the United States on resuming oil exports to the United States; ② Historical data shows that Maduro shipped gold reserves worth about US$5.2 billion to Switzerland in the early days of his administration; ③ The latest shipping data shows that in the past five days, Venezuela's main oil terminal has not exported crude oil to any other destination except for the U.S. Chevron www.xmtraders.company.

New progress has been made in Ukraine’s security architecture: Britain, France and Ukraine signed a statement of intent, planning to send multinational troops to Ukraine after Russia and Ukraine reach a ceasefire agreement. The United States promised to provide intelligence, logistics and other support to the force, and made it clear that it "will provide military support to the force when Russia launches new attacks."

U.S. political news:

Former President Trump said that if the Republican Party loses the midterm elections, he may face impeachment proceedings.

The U.S. Supreme Court announced that it will make a final ruling on the tariff case during the Trump administration this Friday (January 9).

Policy Trends:

The White House confirmed that the Trump administration is planning multiple options to acquire Greenland, among which military options are considered one of the feasible paths.

Fed Governor Milan publicly stated that in response to changes in the economic situation, an interest rate cut of more than 100 basis points may be necessary in 2026.

Summary of institutional views

Analyst James Picerno: U.S. GDP growth is expected to slow down in the fourth quarter, is a recession signal about to be triggered?

After two consecutive quarters of strong growth, U.S. economic output is expected to slow in the upcoming fourth-quarter 2025 report, according to the median estimate of a group of instant GDP forecasts. The expected growth downward revision is significant, but based on current data, it is unlikely to trigger a recession warning.

Judging from the median of real-time data, U.S. GDP will record a moderate growth of 1.3% in the fourth quarter. This is much lower than the 4.3% economic growth rate in the third quarter. The U.S. Bureau of Economic Analysis was originally scheduled to release fourth-quarter data on January 29, but due to the aftermath of the government shutdown, the release date has been postponed, and the specific time has not been announced.

The most optimistic of all www.xmtraders.components of the median estimate is the Atlanta Fed’s GDPNow model, which forecasts GDP growth of 2.7% as of January 5. But even assuming this estimate is accurate, it would still mean growth will slow significantly after strong performances in the second and third quarters.

Looking beyond the fourth quarter, the outlook remains optimistic. Michael Pierce, chief U.S. economist at Oxford Economics, said: "We expect receding policy uncertainty, a boost from tax cuts, and recent easing of monetary policy to mean the economy will strengthen in 2026."

While that may be the case, the latest immediate forecasts suggest some cooling in the final quarter of 2025 before a possible recovery in 2026. "December's preliminary PMI data suggest that recent economic growth momentum is weakening," Chris Williamson, chief business economist at S&P Global Market Intelligence, said of the www.xmtraders.company's survey-based GDP proxy. "New sales growth was particularly sharp as we approach the holiday season," he said in mid-December. "As we enter 2026, economic activity is likely to slow further."

Citi's outlook for December non-farm payrolls: Unemployment is expected to continue to rise, forcing the Fed to continue cutting interest rates in September

Similar to the past few months, we expect the U.S. December non-farm payrolls report to send mixed signals. Among them, non-agricultural employment will increase by 75,000, continuing the relatively strong performance after the summer. Due to major seasonal adjustment problems, the data has upward risks. Employment data throughout 2025 follows a very similar pattern to last year - stronger in months when hiring is typically weak on a seasonally adjusted basis, and weaker in months when hiring typically picks up. This pattern means that employment growth will be strong again in December (non-farm payrolls increased significantly by 323,000 in December 2024).

In fact, in the past 4The -5-week average of continuing and initial jobless claims is even lower than what would be expected given typical residual seasonality. These unusually low readings occurred primarily during the holiday week, indicating seasonal adjustment issues during this year's holiday season beyond the usual residual seasonality. December payroll employment data will essentially capture employment changes during the Thanksgiving holiday, and if these additional holiday seasonality adjustment issues also affect payroll data, we believe there is a risk that December employment data will increase even stronger (closer to 150,000).

After the annual rate of hourly earnings slowed to 3.5% in November, we expect it to continue to decline in December, with the monthly rate perhaps recording only 0.1%, and the annual rate thus further falling to 3.4%. Along with rising unemployment, slowing wage growth is one of the clearest signals that demand for labor is weaker than supply. Details from the Atlanta Fed's wage tracker suggest that wages are starting to slow further among some groups that had experienced "catch-up" wage growth, such as workers who stayed at their jobs rather than jumping ship. As job growth and wages both slow, total income should continue to decelerate further in 2026. Total income should remain the most important factor in determining total consumption growth.

The unemployment rate has continued to rise by 0.1 percentage points each month over the past five months, and we expect this trend to continue and rise again to 4.7% in December. We believe that the government shutdown did not have much direct impact on the unemployment rate in November, and that the unemployment rate rising again (or even maintaining it at 4.6%) should be an important signal that labor demand has indeed weakened further.

We predict that the unemployment rate will rise again, mainly based on our expectation that the labor force participation rate will also rise again to about 62.6%. Changes in this year's post-season adjusted labor force participation rate are highly correlated with seasonality in participation rates. If this correlation holds, it would mean the December seasonally adjusted participation rate would rise by another ~0.1-0.2%. A significant risk to this relationship is that the annual update of the household survey's seasonality factor will be incorporated into the December data, which may smooth out residual seasonality. However, one round of revisions is usually not enough to significantly change seasonality within a year.

Sustained wage and employment growth, and the unemployment rate rising along with the participation rate - as we expected in December - have also characterized the labor market data since September. But it is important that we do not interpret high unemployment due to rising participation rates as a sign that the labor market is "less bad." Conversely, the unemployment rate would have been higher for much of the year if the participation rate had not fallen sharply starting in May. A stable or higher unemployment rate is also consistent with continued jobless claims being at elevated levels for much of the year, including the December household survey reference week.

TS Lombard: The labor market will rewrite the Fed’s interest rate path in 2026. Could continued interest rate cuts be the prelude to a return to inflation?

The Federal Reserve started the new year with a slightly looser stance at the beginning of 2026. Given that it has accepted the view that the impact of tariffs is “temporary”points and expressed concern about the continued weakness in the labor market and the possibility of further interest rate cuts at this month's meeting. Most Fed officials believe that current monetary policy is still somewhat restrictive and that it is unreasonable to continue to suppress demand when job growth is almost stagnant.

The more critical issue is the path later this year. Markets are currently pricing in a soft landing scenario, in which the Fed cuts interest rates to neutral and then leaves them unchanged. But we think differently. Economic activity is likely to rebound in the spring as fiscal stimulus turns expansionary and pent-up demand for capital spending and hiring in non-AI sectors is unleashed. This would normally be good news, but Trump’s immigration policies have led to a shrinking workforce and a recovery in demand will quickly put the labor market under capacity pressure again. This could reignite the debate over whether monetary policy is restrictive enough, and if the new chairman ignores this or insists on cutting interest rates, the Fed's independence will be seriously questioned.

In 2025, faced with six consecutive months of flat employment (a rare situation outside of a recession), the Fed implemented 75 basis points of easing. Officials, concerned that the job market is in a downward spiral, are shifting policy focus toward the jobs side of their mission. However, the current weakness largely stems from the supply-side contraction caused by immigration policies, which not only reduces the risk of triggering a vicious cycle, but also means that the economy has limited spare capacity and less room for disinflation.

If the US non-farm data released this week is still weak, it will strengthen the possibility of cutting interest rates by 25bp at this meeting. But what happens after that? The market believes that the easing will end at "neutral". We believe that the economic recovery will be stronger than the Fed expects, and the labor supply cannot keep up, which may lead to serious worker shortages and wage pressures within the year.

At that time, any inflation caused by a rebound in demand and the passing on of potential tariff costs will test the Fed. Officials may be ignoring the price surge caused by tariffs, but the tightening labor market is hard to ignore — directly challenging the notion that interest rates are at the “right” level. The new chairman (possibly appointed by Trump) will face huge controversy if he follows Greenspan's lead and keeps interest rates low in anticipation of a surge in AI productivity. The key question is whether the new chairman can persuade colleagues to support this strategy or whether it will cause more divisions internally. The Fed's independence and response function are facing an unprecedented test of ambiguity.

ING: German inflation will slow down at the end of 2025 and is expected to be...

Germany's overall domestic inflation rate fell to 1.8% in December from 2.3% in November. Inflation, by European standards, fell to 2.0% from 2.6% in November. Core inflation edged down to 2.4%, while services inflation remained unchanged at 3.5%. Available state data show that the fall in inflation was driven not only by a positive energy base effect, but also by lower entertainment, clothing and food prices in December www.xmtraders.compared with November. Falling food prices are undoubtedly good news for German consumers.

Looking ahead, Germany’s overall inflation rate is expected toIt fell further over the www.xmtraders.coming months and remained below 2% before accelerating again later in the year. In the short term, disinflationary drivers will dominate, including a stronger euro, favorable energy base effects, and domestic and foreign www.xmtraders.companies reselling products from the United States to Europe at dumped prices. The logic of disinflation is also supported by continued declines in production and import prices, which are often effective leading indicators of overall inflation. However, in the longer term, the impending fiscal stimulus will trigger new inflationary pressures in at least some sectors. Recent policy measures have made the outlook for German inflation somewhat www.xmtraders.complicated. The VAT cut on food sales in the catering industry may do more to improve the industry's profit margins than reduce inflation, while the recent increase in the minimum wage may also exacerbate long-term inflationary pressures.

In general, the German inflation rate will basically fluctuate around 2% in 2026; it will be slightly lower than this level in the early stage and slightly higher than this level in the later stage. This is good news for the European Central Bank and the German government, as it removes one worry from the long list of economic challenges.

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