China Merchants Securities (CMSC) released a research report stating that on the local date of January 28, 2026, the Federal Reserve held its FOMC meeting and announced a pause in interest rate cuts. Following this meeting, particularly after Waller voted in favor of a rate cut, uncertainty regarding the new Federal Reserve Chair has increased once again. According to current probability forecasts from Polymarket for the new Fed Chair, the odds of Riedl, Warsh, Waller, and Hassett being elected are 36%, 27%, 17%, and 7% respectively, with the gap narrowing compared to before. Based on the latest policy stances of the candidates, ranking from most dovish to most hawkish would be Hassett, Riedl, Waller, Warsh. Riedl is considered market-oriented; if elected, market expectations would lean towards earlier rate cuts and more asset purchase support, making him the most favorable towards long-term U.S. Treasuries among the four. This would be a short-term positive for U.S. stocks and negative for the U.S. dollar. In the medium term, although risk assets may experience volatility, the 'Fed Put' is expected to persist. Warsh is the most hawkish, placing greater emphasis on discipline and Fed independence, and supports balance sheet reduction (QT). This would be a short-term negative for U.S. Treasuries, positive for the U.S. dollar, and lead to choppy trading in U.S. stocks. In the medium term, a potential divergence from Trump's ideology could lead to renewed political pressure similar to last year, increasing volatility in risk assets. Waller is neutral-leaning-dovish, positioned between Riedl and Warsh. In the short term, the market would expect moderate rate cuts or a maintained easing window, leading to slight gains in U.S. stocks and Treasuries and a slight depreciation of the dollar. He would be friendly towards risk assets in the medium term. Hassett is the most dovish; if elected, the market would anticipate aggressive short-term rate cuts. The short end of the yield curve could fall rapidly, but the long end might conversely rise due to reflexivity, leading to a steepening yield curve, a weaker dollar, and rising U.S. stocks. In the medium term, heightened market concerns about Fed independence could cause significant swings in risk assets. The main views of China Merchants Securities are as follows: The Federal Reserve held steady. The Fed paused rate cuts as expected. Compared to December, this FOMC statement expressed optimism about the economy, removed the phrase "the downside risks to employment have increased in recent months," and noted that "the unemployment rate has shown some signs of stabilizing." The description of the pace of economic expansion was changed from "moderate" to "solid," consistent with the decision to pause cuts. Milan and Waller dissented, voting in favor of a 25 basis point cut. Powell's speech and press conference: His remarks were leaning hawkish, expressing optimism about the economy and emphasizing that both upside risks to inflation and downside risks to employment are diminishing. 1) Economy: Has improved since the last meeting. Speech: Economic activity has been expanding at a solid pace, consumer spending has remained resilient, and business fixed investment has continued to expand. Housing remains soft. The temporary federal government shutdown likely weighed on economic activity last quarter, but these effects should reverse and boost growth this quarter as the government reopens. Press Conference: Incoming data since the last meeting show a clearer growth outlook; all data, including the Beige Book, indicate a solid start to growth this year; overall, economic projections are indeed stronger. 2) Employment: Downside risks to employment are decreasing. Speech: Labor market indicators may be stabilizing after a period of softening. The average monthly change in total nonfarm payroll employment over the past few months was a decline of 22,000, reflecting a slowdown in labor force growth due to reduced immigration and a decline in the labor force participation rate, although labor demand has clearly softened as well. Press Conference: Employment data show some signs of stabilization. The economic activity outlook has clearly improved since the last meeting, which should affect labor demand and employment at some point in the future. 3) Inflation: Tariff-driven inflation pass-through is nearing its end. Speech: Inflation remains somewhat elevated relative to our longer-run goal of 2 percent. Goods inflation has picked up somewhat, while disinflation in services continues. Press Conference: Most of the overshoot in goods prices came from tariffs, and most of the effect of tariffs has likely been passed through. We do think tariff effects could be largely over, representing a one-time price increase. All service categories are showing continued disinflation, which is a healthy trend. Assuming no significant new tariff increases, the disinflation trend is relatively clear. If we see that, it would tell us we can ease policy. 4) Rate Path: Policy rate is in a good place. Speech: Since last September, we have lowered the policy rate by 75 basis points, bringing it back toward neutral. This normalization process should help stabilize the labor market and allow inflation to resume its decline toward 2 percent after tariff effects fade. We are in a good place to determine the extent and timing of any adjustments to the policy rate based on incoming data, the evolving outlook, and the balance of risks. Press Conference: Both upside risks to inflation and downside risks to employment have probably diminished somewhat. We have not made any decisions about future meetings, but the economy is growing at a solid pace, the unemployment rate is stable, and inflation remains somewhat elevated, so we will be focused on the goal variables and let the data guide us. It's hard to say based on current data that policy is significantly restrictive; it might be neutral-to-accommodative or slightly restrictive. Rate hikes are not part of anyone's baseline scenario now. The bar for the next rate cut has been raised. As noted in the commentary on the December 11 Fed meeting, Powell repeatedly mentioned "the extent and timing of any additional adjustments" and noted that goods inflation would likely continue to rise in Q1, implying a high probability of a pause in Q1. Based on today's stance, the threshold for the next rate cut has indeed been raised. On one hand, Powell emphasized that both upside inflation risks and downside employment risks are diminishing and stated that the economic improvement outlook exceeds expectations, which is itself a hawkish signal. On the other hand, when discussing conditions for further cuts, Powell indicated the need to see a clear disinflation trend or a substantive weakening in the labor market. Market Reaction: Gold surged, U.S. stocks edged up, U.S. Treasuries edged down. The three major U.S. stock indices, the S&P 500, Nasdaq, and Dow Jones Industrial Average, changed by -0.01%, +0.17%, and +0.02% respectively. The 2-year U.S. Treasury yield rose 3 basis points to 3.56%, and the 10-year U.S. Treasury yield rose 2 basis points to 4.26%. The U.S. Dollar Index rose 0.82% to 96.54. COMEX gold rose 8.17%, LME copper rose 0.74%, and Brent crude oil rose 1.61%. Risk Warning: U.S. economic fundamentals and policy may exceed expectations.
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