Guolian Minsheng Securities has released a report stating that the core reason for the weaker-than-expected US inflation in this cycle is the lack of effective support from the demand side. The current US economy is experiencing a deep "K-shaped" divergence. While overall economic resilience persists, the balance sheets of the broad middle- and low-income groups have not been effectively repaired. This constrains the foundation for a sustained inflation rebound and preserves room for the Federal Reserve to implement subsequent interest rate cuts. The most significant potential risk currently lies in the inflationary pressure transmitted from rising international oil prices. The firm believes the Fed still has scope to cut rates within the year. The impact of oil prices is felt more on the timing of cuts rather than altering the overall downward trend for rates; the cuts are expected to materialize, albeit later than initially anticipated.

Key viewpoints from Guolian Minsheng Securities are as follows: A sudden geopolitical storm has not only disrupted the Fed's policy rhythm but also put global financial markets on high alert again. Although, following the January FOMC meeting, a marginally stabilizing labor market combined with low inflation had largely solidified market expectations for the Fed's short-term wait-and-see stance, making a steady hold on rates at the March meeting almost certain. However, the recent escalation of Iran-related geopolitical risks has undoubtedly added fuel to the fire of an already sensitive market liquidity environment. The rapid rise in oil prices directly intensifies the dual risks of rebounding US inflation and slowing economic growth, posing a severe challenge to the Fed's balancing act of controlling inflation while stabilizing growth, thereby continuously narrowing its policy margin for error. Market expectations have shifted from two rate cuts this year down to less than one, with the timing pushed back to the fourth quarter, noticeably impacting short-term liquidity conditions.

Consequently, the policy signals conveyed during the March meeting held greater significance than the mere decision on rates themselves. Despite high oil prices, Chairman Powell maintained a cautious, slightly hawkish stance, with three key points warranting attention: First, regarding forward guidance, the policy statement revised its assessment of the economic outlook, adding that "the implications of developments in the Middle East for the U.S. economy remain uncertain." Powell, in his post-meeting remarks, continued this watchful stance, emphasizing the uncertainty stemming from the short-term Middle East situation and the dual risks of rising inflation and slowing economic growth caused by higher oil prices. He indicated that policy decisions would await further clarity on developments and improvements in inflation. Second, the dot plot largely maintained the policy guidance from December, still projecting one rate cut within the year. However, more participants showed hawkish inclinations. Only one dissenting vote was cast at the March meeting, reflecting Fed officials' reassessment of inflation risks. Some officials even began discussing the possibility of rate hikes, though this is not part of the baseline scenario. Third, the economic projections concurrently raised the 2026 forecasts for economic and inflation growth. The core PCE inflation forecast was revised up from the previous 2.4% to 2.7%, hinting at the Fed's underlying concerns about a higher inflation baseline. However, the slight upward revision to economic growth suggests that "stagflation" is not the Fed's base case expectation for the economy.

For assets, the Fed's reinforced policy resolve in the short term may exacerbate concerns about global liquidity tightening. If the Middle East situation does not see substantial easing, the pattern of simultaneously strengthening oil prices and the US dollar may be difficult to reverse in the near term. Coupled with persistently delayed rate cut expectations and potential liquidity tightening, global major asset classes could face further pressure. Overnight, assets like stocks, bonds, and gold have already faced broad adjustment pressures, with liquidity issues becoming more apparent. Short-term strategy should prioritize cautious observation, awaiting clearer developments. For equity markets, high-valuation tech sectors, particularly AI-related areas highly sensitive to discount rates and cash flows, might face valuation compression in the short term. Conversely, anti-inflation, defensive sectors like energy and utilities are more likely to attract capital. Notably, while gold is currently suppressed by a stronger dollar and rising rates in the short term, its value as a hedge against geopolitical and inflation risks will continue to attract strategic allocation over the medium to long term. As volatility returns to reasonable levels, gold is poised for a new upward trend.

Looking ahead, is there still potential for Fed easing? The firm believes room for rate cuts remains within the year. The fundamental issue behind the weaker-than-expected US inflation is the lack of robust demand-side support. The deep "K-shaped" divergence in the US economy, where the balance sheets of many middle- and low-income households remain impaired, limits the basis for persistent inflation recovery and preserves the Fed's operational space for future cuts. Admittedly, the primary potential risk currently stems from inflationary pass-through due to rising international oil prices. However, compared to the 2022 oil price shock, the global economy was then in a post-pandemic recovery phase, with synchronized fiscal and monetary support in Europe and the US, leading to rapid repair of consumer demand. This allowed upstream oil price increases to transmit smoothly to refined products, chemicals, and ultimately consumption and services. In the current weaker fundamental environment, the duration and breadth of inflationary pressure are likely to be more subdued compared to 2022. Current breakeven inflation rates suggest long-term inflation expectations remain relatively stable, showing no significant signs of becoming unanchored, which further supports the case for eventual rate cuts.

In summary, the firm maintains that the Federal Reserve retains the capacity to cut interest rates before year-end. The influence of oil prices is primarily on the pacing of these cuts rather than negating the overall downward trajectory for rates. The anticipated monetary easing is delayed, not canceled. Risk warnings include significant changes in US trade policy; tariffs spreading beyond expectations, leading to greater-than-anticipated global economic slowdown and market adjustments; frequent geopolitical events increasing global asset volatility; and oil prices rising beyond expectations, raising the risk of stagflation in the US.