In the early hours of January 9, Beijing time, the Federal Reserve made a significant disclosure regarding the minutes from its Federal Open Market Committee (FOMC) meeting, which took place on December 17-18, 2024. These minutes revealed important insights into the current economic climate and the Fed's future monetary policy decisionsAs discussions within the committee progressed, it became clear that participants emphasized the need for caution in governing monetary policy in the coming quarters, considering a variety of factors influencing the economic landscape.

The committee members articulated a consensus that interest rates are currently near, or in fact at, a point where it may be prudent to moderate the pace of any potential rate cutsNevertheless, they firmly stated that future monetary measures will not be guided by a rigid timeline but will instead be responsive to evolving economic data

In the context of these discussions, the committee members projected only a modest total decrease of 75 basis points in interest rates throughout the year 2025.

On January 8, the U.Sdollar index managed to rebound for the second consecutive day, surpassing the 109 markHowever, the movements in U.STreasury yields and equities were mixedUpon market closure, the yield on the two-year Treasury note had decreased by two basis points to 4.28%, while the ten-year note remained stable at 4.67%. U.Sstocks experienced volatility throughout the day, with indices like the Dow Jones and S&P 500 showing slight upticks of 0.25% and 0.16% respectively, while the Nasdaq dipped by 0.06%. In the commodities market, international gold prices continued their upward trajectory, with February futures settling at $2672.4 per ounce, reflecting a gain of 0.26%.

One critical concern articulated in the minutes was the increasing likelihood of persistent high inflation

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Despite the overall inflation rate in the U.Sshowing signs of moderation in 2024, nearly all committee members identified a rising risk of inflationary pressuresRecently released monthly inflation metrics that exceeded expectations have contributed to a sentiment of apprehension amongst participants regarding current inflation trends, leading them to acknowledge that the duration of elevated inflation rates may be longer than initially anticipatedStill, they maintained a confident outlook that inflation would eventually revert to the Fed's long-term target of 2% within the next few years.

Data from the Chicago Mercantile Exchange indicated that the probability of maintaining interest rates at their current level in January was a notable 95.2%, while the chance of a 25-basis-point cut was only 4.8%. The prospects for March showed a 62.8% likelihood of holding rates steady while presenting a 35.5% chance of a cumulative reduction of 25 basis points, and a mere 1.6% probability for a total cut of 50 basis points.

Fed officials, conveying a more hawkish tone recently, have underscored the importance of vigilance and caution

During a recent statement, a Federal Reserve Governor raised doubts about whether the recent uptick in U.Sinflation data represents merely a blip rather than a sign of lasting improvement, emphasizing that the Fed's efforts to curb inflation are far from overAdditionally, Raphael Bostic, the president of the Federal Reserve Bank of Atlanta, addressed the need for a careful approach with regard to interest rates, suggesting that keeping rates elevated would be prudent until a clearer picture of inflation stabilization emerges.

Moreover, there's an acute focus among Federal Reserve policymakers on labor market data as they consider their next steps in monetary policyFreshly anticipated non-farm employment numbers from the U.SBureau of Labor Statistics later this week are being closely watched by market participants, who caution that unanticipated results could lead to notable fluctuations in market dynamics.

Market expectations surrounding potential interest rate cuts by the Federal Reserve have notably declined this year, revealing increased volatility in the capital markets

The resurgence of inflation expectations has led analysts to speculate that the extent of rate cuts in 2025 may taper further, provoking considerable shifts in Treasury yields and the U.Sdollar indexAs the dollar continues to strengthen, the key determinants for maintaining the dollar index's elevated position remain apparent.

In practical terms, analysts project that the dollar index could potentially surge above the 110 mark in the short term, while maintaining a medium-term range of 104 to 110. In the realm of Treasury securities, as the likelihood of a rate cut decreases, yields for U.STreasuries remain elevated, with the 10-year Treasury yield hovering at its highest in seven months—a benchmark that influences other developed economies’ bond yields.

The persistent climb of Treasury yields, combined with an end-of-year profit-taking mentality, has amplified downward pressure on U.S

equities, leading to significant market reactionsDrawing from historical patterns, it is evident that market expectations for rate cuts by the Federal Reserve tend to shift dynamicallyCurrently, with the market predicting one or two rate cuts in 2025, a two-year Treasury yield around 4.2% appears reasonable, marking it as a secure zone within the Treasury market.

The fluctuations in long-term debt yield not only illustrate market indecision but may also give rise to further volatilityFor instance, following a 100-basis-point hike after the Fed's anticipated rate cut in September 2024, the steep rise startled investors, making it a vital macro risk factor influencing the adjustment within the equity market.

In terms of commodities, the rapid strengthening of the dollar has diminished gold's attractiveness relatively, thereby reducing demand somewhatNonetheless, recent fluctuations in the equity markets, alongside concerns relating to tariffs and other key policy developments, have prompted an increase in market volatility