TechFlow news — On January 14, according to Jinshi News, Ben Emons, Chief Investment Officer at FedWatch Advisors, stated that the Federal Reserve is facing a policy dilemma. Current economic data have turned the Fed into a "lame duck," with no compelling reason to move interest rates in either direction. Meanwhile, financial conditions are tightening, and the stock market may begin pressuring the Fed to cut rates again.
The current 4.5% policy rate is near neutral levels. However, core PCE remains above target, the unemployment rate is below the natural rate, and economic growth could exceed its potential trend. Fed models suggest that if inflation were close to target, the real interest rate should be between 2.5% and 3%. This implies the current 4.5% policy rate is already around neutral—leaving the Fed with little room to cut rates while also lacking justification for hiking them.
Emons emphasized that the rising trends in term premium and neutral interest rate deserve attention. Since last fall, both indicators have accelerated amid sustained economic strength and recovering market confidence. If growth expectations continue to strengthen, pushing up the neutral rate and term premium further, the Fed's policy space will become even more constrained, requiring markets to adjust their rate-cut expectations accordingly.
