Gaozhan Weekly Interest Rate Report | Major Fed Announcement! Consensus to Pause Rate Cuts, Trump Policies Add Uncertainty—How to Navigate Asset Allocation?

Issue 202601

According to CME FedWatch, the market probability for a 25-basis-point rate cut by the Fed at the end of January 2026 is 2.8%, while the probability of maintaining the current interest rate is 97.2%.

Fed Meeting Preview: Pause in Rate Cuts Consensus, Policy Uncertainty Intensifies

Interest Rate Decision Expectations:The market widely expects the Federal Reserve to pause rate cuts at its first interest rate meeting of 2026 on January 28,maintaining the federal funds rate target range at 3.5%-3.75%; all 100 economists surveyed by Reuters share this expectation, with 58% predicting stable rates throughout the first quarter, a significant shift from previous forecasts of a 'March rate cut'.The target range for the federal funds rate remains unchanged at 3.5%-3.75%; a Reuters survey of 100 economists showed the same expectation, with 58% predicting that the rate will remain stable throughout the first quarter, a significant shift from the previous expectation of a "rate cut in March."

Divergence in Policy Path：Internal disagreements persist within the Federal Reserve regarding the future pace of rate cuts; officials’ projections for the number of rate cuts in 2026 are split —some predict more than one rate cut, while others advocate halting rate cuts or even raising rates; externally, Fed Vice Chair Jefferson emphasized that policy needs to be decided 'meeting by meeting,' requiring dynamic adjustments based on economic data, further highlighting path uncertainty.

Key Market Data: RRP Scale Reflects Liquidity Conditions

January 22, 2026The usage scale of the Federal Reserve's Overnight Reverse Repo (RRP) dropped to $2.058 billion, a significant decline from $3.344 billion on the previous trading day, reflecting that theexcess liquidity in the U.S. money market continues to contract, with funds gradually shifting from risk-free reverse repo tools to higher-yielding assets such as short-term U.S. Treasuries, bringing market liquidity closer to a 'low-redundancy' state.

U.S. Economic Fundamentals: A Divergent Picture of Resilience and Concerns

Macroeconomy: Resilience coexists with concerns, growth momentum marginally slows down

- Economic Growth: The final annualized Q3 GDP growth rate was 4.4%, showing economic resilience, but the December Pending Home Sales Index plunged by 9.3% month-on-month, reflecting ongoing weakness in the real estate market under high interest rates, posing concerns for economic growth.

- Consumption and Inflation:The University of Michigan Consumer Sentiment Index rose to 56.4, with the one-year inflation expectation falling back to 4%. However, the sentiment index remains at a historically low level, indicating consumers' cautious attitude towards the economic outlook.

Job market: Overall strong, but marginal trends are showing divergence

-Resilience remains in the job market:Initial jobless claims for the week ending January 17 were 200,000, down 11.1% from 225,000 during the same period last year, remaining in a historically low range. The data shows low corporate layoff intentions, tight labor market supply, providing underlying support for consumer spending, and serving as one of the core drivers of economic resilience.

Commodity markets: Weak crude oil demand, prices under significant pressure

-Imbalance in crude oil supply and demand:The EIA crude oil inventory announced a figure of 3.602 million barrels, far exceeding the forecast of 1.131 million barrels and the previous value of 3.391 million barrels, representing a 71.5% increase from 2.10 million barrels during the same period last year. The substantial inventory increase is due toweak performance on the U.S. crude oil demand side,combined with periodic increases in imports and production, loosening the market's supply-demand relationship and significantly pressuring crude oil prices.

Market reaction: Policy and risk aversion dominate market divergence

Stock Market: Policy Reversals Drive Volatility, Confidence Remains Weak

- Trend:Recently showing"Sharp panic-driven plunge followed by volatile recovery"On January 20th, the market suffered its largest single-day drop since October of last year due to tariff threats. As of the close on January 23rd, prices rebounded slightly.

- Drivers: Core drivers include reversals in Trump's tariff policies and geopolitical tensions, coupled with a tug-of-war between strong corporate earnings reports and positive economic data, leading to policy uncertainty dominating short-term fluctuations.

Bond Market: High Volatility, Rising Long-Term Yields

- Trend:Yields have been fluctuating at relatively high levels, once spiking to 4.3% amid a sell-off, before retreating slightly. The long-term trend remains upward for yields and downward for bond prices.

-Driver:Accelerated capital outflows from multiple countries, concerns over the expansion of the U.S. fiscal deficit, coupled with the unpredictability of Trump administration policies, have raised market concerns about the safety of U.S. bonds, driving yields higher.

Gold Market: Continued strength under risk-off sentiment

-Trend: Continued strength and hitting new highs recently, with significant! significant!!显著, overall showing a steady upward!上涨态势.

-Driver: Sell-offs in U.S. assets, escalating geopolitical risks, uncertainty in Federal!美国资产出售潮、地缘政治风险升级、美联储政策不确定性叠加去美元化趋势，避险资金流入推升价格.

Dynamics of other major central banks

European Central Bank

The minutes of the ECB's December meeting published on January 22 showed that officials were satisfied with the current policy stance and retained flexibility on interest rate decisions.Believes that inflation is close to the 2% target and will remain stable。

Bank of Japan

On January 23, the Bank of Japan voted 8-1 to maintain the 0.75% policy rate, stating that the economy is recovering moderately and underlying inflation will rise gently; if expectations are met, further rate hikes will continue, while a widening yen decline may force an interest rate hike in April.

People's Bank of China

In 2026, the People’s Bank of China implemented a moderately accommodative monetary policy with room for reductions in the reserve requirement ratio (RRR) and interest rates. Liquidity was injected through Medium-term Lending Facility (MLF) operations and reverse repos, while relending and rediscount rates were lowered. Efforts to internationalize the renminbi and open up the financial sector were advanced, with Shenzhen maintaining its position as the third-largest city in terms of deposits and loans nationwide.

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