Looking at the inflation over the past few months, remaining steadily below 3%, the Federal Reserve has still remained inactive, showing enough caution, which is also understandable and in line with market expectations. The market has been taught a lesson in recent years; the expectation dot plot has basically been inaccurate since the end of 2023 until September 2024, overestimating the expectations for interest rate cuts, to the extent that now, even with inflation declining, there is a reluctance to give aggressive expectations for rate cuts.
The Federal Reserve's inaction is an understandable expectation, as there is a Trump making the dollar quite troublesome. If the Federal Reserve also adopts aggressive rate-cutting policies, the dollar's performance, both domestically and internationally, would not just be as it is now. Therefore, when Trump first started pressuring the Federal Reserve, threatening to replace the Fed Chair, there were two conclusions at that time: despite Trump's loud demands, he cannot undermine the independence of the Federal Reserve, and the bottom line of the dollar must be maintained to avoid excessive loss of control. In the end, Trump may even have to thank the Federal Reserve.
As for the pressure from U.S. Treasury bonds, you cannot expect that cutting interest rates will solve it. This has been a long-term cost accumulated since 2008, and it is not the result of any single government. If you study the Japanese model, you will have to expect long-term entrapment, for example, with government leverage at 120%. If inflation rebounds, the central bank's primary duty is to be responsible for the purchasing power of the currency. The reality is that interest rates need to be raised, and even Japan, with government debt exceeding 220%, may need to continue raising rates. After raising rates, the burden on government debt increases, for instance, in the U.S., where the proportion of interest rates at 18% or even higher accounts for fiscal expenditures, relying solely on a central bank cannot resolve so many accumulated issues, and the cost of rebounding inflation will be greater.
As a side note, the Federal Reserve is one of the major buyers of U.S. Treasury bonds and is also one of the main channels for the issuance of base money in the U.S. Currently, relaxing the use of Treasury bonds as collateral for stablecoins somewhat reduces the dependence on Treasury bonds by the Federal Reserve, but it is not yet clear how much it can absorb and what the future risks may be.
Returning to this issue, as for when to start cutting interest rates, I have previously provided expectations:
1) Inflation has been stable at 2-2.5% for six consecutive months without significant upward trends; this is a prerequisite for market factors for the Federal Reserve to cut interest rates.
2) The Trump administration should quickly implement tariff policy agreements with major trading partners to reduce the inflation shock brought about by policy uncertainty.
In this situation, the Federal Reserve's interest rate cuts will accelerate, with more than three months of space remaining. Inflation is performing well now; it depends on the progress of the Trump administration's tariff negotiations.
