Why haven't the "stock, bond, and currency triple decline" yet been able to force the Federal Reserve to cut interest rates? Despite the recent sharp drops in stock markets, bond yields, and the value of the currency, the Fed has not yet responded with a rate cut. This situation raises questions about the underlying economic conditions and the Fed's policy stance. Investors are closely watching for any signs of a shift, but as of now, the central bank remains cautious, possibly waiting for more economic data before making a move.

Recently, the sharp increase in policy uncertainty in the United States has triggered intense fluctuations in the financial markets, with extreme scenarios of ‘stock, bond, and currency triple decline’ temporarily unfolding, driving safe-haven funds to flood into gold. Against this backdrop, the Federal Reserve’s policy meeting on January 27-28 has become a global focus. Currently, the Trump administration is challenging the independence of the Federal Reserve, the sustainability of US fiscal expansion requires coordination with monetary policy, and with the upcoming earnings season for US stocks, the Federal Reserve’s monetary policy largely determines the trend of various asset prices, including US stocks.

From a macro perspective, the US economy is still in the early stages of slowdown but remains resilient. The employment market is unlikely to deteriorate sharply in the short term, which suggests a high probability that the Fed will hold steady in January. Additionally, the two main factors historically triggering sudden rate cuts by the Fed—dollar liquidity tightness and systemic risks from a sharp decline in US stocks—have not yet manifested.

Deceleration but Still Resilient US Economy

For the US economy, some macro indicators remain relatively strong, with GDP growth, private consumption, and exports all showing upward momentum. However, consumer confidence continues to decline, manufacturing remains sluggish, real estate is subdued, and the employment market is cooling. Moreover, the outlook for small and medium-sized enterprises is much weaker than that for large corporations, and traditional industries are far less prosperous than the tech sector. This is a typical K-shaped recovery.

The US economy also benefits from fiscal expansion, as increased tariff revenues provide funding for government spending. Data shows that in 2025, through additional tariffs, the actual tariff rate rose to 11.1%, generating $287 billion in tariff revenue, alleviating the fiscal pressure caused by tax cuts under the ‘Big Beautiful’ Act. Calculations indicate that in fiscal year 2025, the US government deficit shrank from $1.83 trillion to $1.76 trillion, with the deficit-to-GDP ratio decreasing from 6.4% to 5.8%, and debt increasing from $2.21 trillion to $2.17 trillion.

On the demand side, falling inflation and tax cuts kept disposable income stable in the third quarter, while rising US stock prices boosted high-income earners’ income effects. Overall, US consumer spending shows divergence: the housing and stock markets have been sluggish for three consecutive years, with high housing prices and high interest rates creating a ‘double constraint.’ In 2025, as consumption growth slows, the share of essential goods in the consumption structure increases, and the gap between high-income and middle- to low-income groups widens. This indicates that consumer growth is increasingly dependent on a small elite rather than broad middle-class expansion. Consequently, investor confidence remains subdued.

The US economy is entering a fragile equilibrium period highly dependent on technology, finance, and policy coordination. This complex situation has repeatedly recurred in US economic cycles. Whether it was the late 1990s tech bubble or the asset price recovery in the 2010s, the US has experienced phases of concentrated growth and social polarization. When growth is driven mainly by capital-intensive and technology-intensive sectors, its societal diffusion effects tend to be limited.

Higher Threshold for Rate Cuts

Since the Fed’s precautionary rate cut in December last year, the threshold for rate cuts in 2024 has clearly increased, and the market generally expects the Fed to hold steady in January. The dot plot released after the last policy meeting indicates that most Fed officials expect one more rate cut in 2026, but the timing depends on economic data. The CME FedWatch tool shows a 97.2% probability that the Fed will keep rates at 350-375 basis points, with only a 2.8% chance of lowering to 325-350 basis points.

Chart: FedWatch tool’s estimated probability of rate cuts

Historically, the Fed’s rate cuts are more focused on employment conditions. Currently, US inflation remains relatively moderate, partly because tariffs have a lagged effect on inflation, and actual tariff rates are lower than expected. Therefore, the reason for the Fed to continue cutting rates might be ongoing weakness in the employment market. Looking at manufacturing PMI sub-indices, the employment index rebounded modestly in December from 44% to 44.9%, still below the 50-point expansion-contraction threshold, but the employment decline momentum has not worsened.

Dollar liquidity remains ample. Historically, if a dollar liquidity crisis occurs, the Fed might unexpectedly cut rates to support market liquidity and prevent systemic risks. Looking at overnight borrowing rates, the SOFR has not surged significantly during recent market turmoil; instead, it has fallen back, maintaining around 3.66% on January 26, below last year’s average of 4.34%. The overnight reverse repurchase agreement (RRP) volume on January 26 reached $14.89 billion, significantly higher than the previous day’s $9.27 billion, indicating ample market liquidity overall.

In the short term, US stocks do not show signs of sustained sharp declines. Similarly, concerns about systemic risks from a stock market crash have existed before, but the Fed has used rate cuts and other measures to stabilize the market, and such measures are not currently deemed necessary. As mentioned earlier, dollar liquidity remains abundant, and from a corporate earnings perspective, there has been no unexpected deterioration. Among the S&P 500 companies providing 2026 earnings guidance, about half have outlooks exceeding market expectations.

Increasing Policy Uncertainty in the US

Recent significant volatility in financial markets reflects rising macro policy premiums and their unpredictability. Geopolitical factors, including potential military interventions and territorial claims on Greenland, have heightened risk exposure concerns. Meanwhile, political polarization and debates over fiscal expansion and debt sustainability continue to suppress investor risk appetite. From a monetary policy perspective, the independence of the Fed faces challenges; this month, the US Department of Justice launched a criminal investigation into Fed Chair Powell. Additionally, the voting stance of Waller, one of the potential successors to Powell considered by Trump, may attract extra attention.

In summary, the US economy is currently in a fragile balance under ‘K-shaped’ divergence. Although growth momentum has slowed, its structural resilience reduces the urgency for the Fed to cut rates in January. From a risk perspective, the employment market’s deterioration has slowed, dollar liquidity remains ample, and US stock earnings are still supported, so there is no immediate need for emergency monetary intervention. Furthermore, amid high policy uncertainty under the Trump administration and potential leadership changes at the Fed, maintaining a ‘wait-and-see’ stance is the best approach for the Federal Reserve to preserve independence and stability. The overwhelming consensus reflected in the CME FedWatch tool confirms that the market expects the January meeting to ‘hold steady.’