Core Viewpoint - The global financial system is undergoing profound changes, marked by the Federal Reserve's recent interest rate cuts, which signal a significant shift in monetary policy and its implications for global economic coordination and financial governance [1][13]. Group 1: Federal Reserve's Rate Cuts - The Federal Reserve announced a reduction in the federal funds rate target range from 4.25%-4.50% to 4.00%-4.25% on September 18, 2025, marking its first rate cut since 2025 [1][13]. - On October 29, 2025, the Fed further lowered the target range to 3.75%-4.00%, totaling a 50 basis point reduction for the year, indicating a critical turning point in its monetary policy cycle [1][13]. - This shift is driven by both domestic economic conditions and the need to address global economic slowdown and inflation dynamics [1][13]. Group 2: Economic Indicators and Labor Market - The U.S. labor market is showing signs of deterioration, with the unemployment rate rising to 4.3% in August 2025, the highest in nearly four years, indicating a complex interplay of cyclical and structural economic challenges [2][14]. - The number of non-farm payroll jobs added has been significantly revised down, with a reduction of 911,000 jobs from April 2024 to March 2025, highlighting deeper adjustments in the labor market than previously reported [2][14]. - The Fed's acknowledgment of increased risks in the labor market reflects a broader concern about potential economic recession [2][14]. Group 3: Inflation Dynamics - Despite inflation levels remaining above the Fed's 2% target, the year-on-year increase has shown a declining trend for five consecutive months, indicating a complex inflationary environment [3][15]. - The current economic backdrop resembles a "stagflation" scenario, where economic growth slows while inflation remains relatively high, complicating monetary policy decisions [3][15]. - The Fed's updated forecasts suggest a gradual return to the 2% inflation target by 2028, providing a theoretical basis for the recent rate cuts [3][15]. Group 4: Global Economic Impact - The Fed's monetary policy adjustments are expected to have significant international repercussions, influencing capital flows and financing conditions in emerging markets and developing economies [4][22]. - The interconnectedness of the global financial system necessitates that U.S. monetary policy considers its international effects, particularly in light of slowing growth among major trading partners [5][18]. - The Fed's actions may catalyze a shift towards a more diversified international monetary system, as changes in dollar liquidity conditions affect financing costs in emerging markets [4][22]. Group 5: Market Reactions and Asset Pricing - The initial market reactions to the Fed's rate cuts have been volatile, with significant fluctuations in stock indices and bond yields, reflecting investor uncertainty about the economic outlook [7][23]. - Historical patterns suggest that preventive rate cuts can boost stock market performance, yet current economic fundamentals may limit the effectiveness of such measures [7][23]. - The pricing mechanisms for commodities and other assets are undergoing adjustments, with gold prices surging in response to the anticipated monetary policy changes [7][24]. Group 6: Capital Flow and Investment Strategies - The Fed's rate cuts are likely to alter global capital flow patterns, with a potential shift of investments from dollar-denominated assets to emerging markets seeking higher returns [6][20]. - Recent data indicates a reversal in foreign investment trends in China, with significant net inflows into domestic stocks and funds, reflecting increased global capital interest [6][25]. - Investment strategies will need to adapt to the changing risk-return profiles of various asset classes, necessitating a reevaluation of traditional asset allocation models [6][25].

Report Industry Investment Rating No information about the report industry investment rating is provided in the document. Core View of the Report The report delves into the evolution of the Phillips Curve and its current state of alienation in the US, aiming to explain the Fed's policy dilemmas. It analyzes the factors contributing to the flattening and steepening of the curve and offers insights into the Fed's current policy stance, including reasons for delaying interest rate cuts [2][8][14]. Summary by Related Catalog Evolution of the Phillips Curve Theory - In 1926, Irving Fisher pointed out the inverse relationship between unemployment and price changes, emphasizing the impact of unexpected price changes on the economy [3]. - In 1958, Phillips proposed the negative correlation between the unemployment rate and the rate of change in money - wages, and drew the Phillips Curve [3]. - In 1960, Samuelson and Solow proposed the "unemployment - price" Phillips Curve, replacing the rate of change in money - wages with price increases and incorporating the theory of wage - cost - driven inflation [4]. - In 1962, Okun proposed the "output - price" Phillips Curve, replacing the unemployment rate with the economic growth rate. The combination of Okun's Law and the Phillips Curve forms the basis of the Keynesian policy framework [5]. - In the 1970s, Friedman and Phelps proposed the Phillips Curve with adaptive expectations, introducing the concepts of short - term and long - term curves and the natural unemployment rate [6]. - In the mid - 1970s, the rational expectations school argued that there is no stable relationship between unemployment and inflation in both the short and long term, and the Phillips Curve is vertical [7]. - After the 1980s, the New Keynesian Phillips Curve (NKPC) became systematic, emphasizing forward - looking expectation management [7]. Alienation of the Phillips Curve - **Flattening**: In recent years, the Phillips Curve has flattened. From 1960 - 1983, the slope was 0.67, but from 2000 - 2019, it dropped to 0.03, making it difficult for policymakers to adjust inflation and employment. Factors include stable inflation expectations, supply - chain reconstruction due to trade globalization, and labor - market structural issues [8][9][10]. - **Steepening**: Since 2020, due to large - scale fiscal stimulus and supply - side disruptions after the pandemic, the Phillips Curve has shown a short - term steepening, leaving behind government debt pressure and weakening the curve's elasticity [11]. - **Underlying Cause**: The essence of the Phillips Curve's changes is that the US economy is no longer a closed loop, and the economic cycle's scope changes, leading to local breaks in the curve [12]. Understanding the Fed's Policy Attitude - **Two Concerns**: The Fed is worried about uncontrollable inflation expectations and whether tariff shocks and loose policies will lead to persistent inflation [14]. - **Reasons for Delaying Interest Rate Cuts**: The Fed's ability to suppress inflation is declining; the effectiveness of interest rate cuts depends on the smooth operation of the global dollar system; managing inflation expectations is crucial; and the Fed uses the CME FedWatch tool for expectation management [15].