The global financial landscape has recently been captivated by the movements of the US Federal Reserve (Fed), as speculations regarding its monetary policy grow more ferventStrong job figures released last week hinted at a potential slowdown in interest rate cuts, while the latest Consumer Price Index (CPI) data released on January 15 sparked renewed expectations for such reductionsThe attitude of the Federal Reserve officials appears cautious, adamantly stating that future monetary policy decisions will hinge on economic data performance.

According to expert insights, it seems likely that the Federal Reserve will opt for a wait-and-see approach during its January meeting, choosing to keep rates steadyThe path of future interest rate reductions remains uncertain, making it challenging to determine whether the peak of the US dollar index and treasury yields has been reachedIn the short term, the strong dollar pattern might continue, with high treasury yields imposing pressure on equity asset performance.

Despite recent figures showing a marginal easing in core inflation in the United States, experts argue that inflation remains persistently high, raising concerns over the potential for a reboundReports from the US Labor Statistics Bureau reveal that in December 2024, the CPI increased by 0.4% month-on-month, marking the largest rise since March of the same year; core CPI, excluding volatile food and energy prices, experienced a month-on-month rise of 0.2% and a year-on-year increase of 3.2%, still exceeding the Fed's long-term objective of 2%.

Following a continuous decline in inflation from April to September 2024, a rebound has been observed for three successive months, culminating in a slight easing of core inflation in DecemberHowever, as the low base effect begins to dissipate, a potential return to a downward trend in inflation cannot be ruled out.

Considering the Fed has already cut rates by 100 basis points, alongside the heightened uncertainty surrounding US policies, factors influencing inflation have proliferated, thus creating an unfavorable outlook for disinflation

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Although risks of a significant rebound in inflation may be low at present, vigilance is warranted since inflation remains stubborn.

The Fed's latest report also highlights concerns within the market regarding the risks associated with rising inflationThe Beige Book, released by the Fed on January 16, indicates a slight growth in economic activity across the twelve regional reserve bank districts from late November to DecemberConsumer spending saw a modest increase, while many regions reported that manufacturers were amassing inventory in anticipation of potential tariff increasesCertain respondents expect that these tariffs could contribute to price hikes across various categories in 2025.

As the Fed prepares to convene its first monetary policy meeting of 2025 on January 28-29, market participants largely expect the central bank to hold off on further cuts, maintaining the federal funds rate target range between 4.25% and 4.5%.

New York Fed President John Williams, a key figure in the Federal Reserve, underscored the prevailing uncertainties facing the Fed during a speech on January 15. He emphasized the elevated uncertainties surrounding the US economic outlook, particularly regarding fiscal, trade, immigration, and regulatory policiesAs such, future monetary policy actions will continue to rely heavily on the overall trajectory of economic data and prevailing trends.

"The fluctuations in the December 2024 inflation data are not expected to significantly impact the Fed's current decision-making; the Fed is likely to adopt a pause in future meetings," noted WilliamsThe consensus appears to suggest that the Fed might enact one or two cuts throughout 2025, taking a gradual approach before potentially accelerating later.

Despite trends indicating a slowing of US inflation, prevailing economic resilience amid high fiscal deficits and ongoing policy uncertainties pose tangible challenges for the Fed in slashing rates during the first quarter of 2025.

DWS Group's Head of Fixed Income, George Catzlambon, expressed a more cautious outlook on the Fed's monetary policy trajectory for 2025. He posits that, should the Fed refrain from instituting rate cuts before the Jackson Hole Symposium at the end of August, the likelihood of cuts throughout the year diminishes significantly.

In light of the Fed's anticipated pause on rate cuts this month and the unclear trajectory of future reductions, how will the allocation logic across major asset classes play out?

Chief economist Lu Zhe from Dongwu Securities asserts that recent robust "non-farm payroll" and PMI figures have reinforced expectations of growth in the US economy

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Meanwhile, tax reductions, tariffs, and immigration policies are expected to introduce heightened uncertainties and upward risks associated with US inflationThis situation may shift the rate policy expectation curve upward, with the prevailing high rates overshadowing the positive impact stemming from the strong non-farm payroll data on equity valuationsEssentially, the market seems to be following a "good news is bad news" pattern—strong growth leading to monetary tightening, tightening financial conditions, and declining asset prices.

Divergent perspectives have emerged within Wall Street regarding the future performance of US equitiesGoldman Sachs recently revealed that institutional investors, notably hedge funds, are significantly shorting US stocksThe firm warns that 2025 could pose a series of risks to the equity market, thereby augmenting the potential for substantial corrections at some pointConversely, UBS Wealth Management contends that even with potential reductions in Fed rate cuts in the coming years, favorable conditions for equities may persist, bolstered by falling borrowing costs, resilient economic activity, expanded earnings growth among corporations, and further monetization of artificial intelligence.

The US dollar index has recently demonstrated formidable performance, surging past 110 on January 13. In the short term, a continuation of this robust trend for the dollar index is anticipatedHowever, it has reached levels where market positioning may be fully exploited, leading to likely fluctuations at elevated levels going forward.

"In the near future, given the stronger-than-expected US economic data, the rapid expansion of the net deficit, and the uncertainty around the effects of US policies, it remains challenging to ascertain whether the peaks of the dollar index and treasury yields have been attained," analysts noteHigh treasury yields could continue to place pressure on equity performance in the short run.

Furthermore, a scenario where US policies underperform market expectations and cause a subsequent decline in both the dollar index and treasury yields remains a significant consideration

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