Allianz Global Investors: Expect the Fed to hold steady in January, and potentially cut interest rates only once in the first half of 2025.

Allianz Global Fixed Income's Chief Investment Officer Michael Krautzberger commented that the Federal Reserve is expected to hold its policy meeting on January 28-29, so the target range of the federal base rate will remain at 4.25-4.50%. The bank believes that the Fed's policy stance will remain cautious in the first few months of 2025. The market consensus has shifted to believe that the Fed's policy stance will not be as dovish as before, and the bank believes that the Fed will only cut interest rates once in the first half of 2025. Considering the growth and inflation expectations of the US economy, the bank believes that the current market consensus is reasonable.

At the same time, Allianz said that if its expectations for the US's real interest rates and bond duration premiums further rebound, it may be enough to tighten the US financial environment and weaken the higher growth expectations for the US economy this year, prompting the Fed to take action again.

The bank believes that the current market environment is conducive to steepening the US yield curve. Given the inflation risk that may occur in the US in 2025, from a strategic perspective, the bank prefers a short-term maturity strategy and US TIPS.

With the new US government taking office, the US economy is still performing well, with little indication that the labor market will deteriorate sharply. Meanwhile, the market is generally optimistic about the US economy this year, with a forecast of 2.2% growth in 2025, compared to 2.8% in 2024, driven by Trump's pro-growth policy agenda. However, the situation of inflation is more complicated; while inflationary pressure has eased, the Fed's preferred core PCE inflation indicator is still above the target of 2.8% year-on-year. Therefore, the bank believes that the Fed will maintain a cautious policy stance in assessing new growth and inflation data and will remain on the sidelines in the short term.