Report Industry Investment Rating No relevant content provided. Core Views of the Report - The political power within the Federal Reserve Board is in a fragile balance. Trump's personnel arrangements have tilted the policy scale towards the dovish side, threatening the Fed's independence. If Trump gains a majority on the board, the implementation of monetary policy independence will face greater resistance [6][28][43]. - The Fed may be facing the trend of "fiscal dominance" again. High - level government debt, expanding fiscal deficits, and political pressure are forcing monetary policy to compromise with fiscal needs rather than firmly control inflation. However, the Fed needs to maintain a certain degree of independence on the surface to avoid inflation expectations getting out of control and U.S. debt risks spiraling [6][67][68]. - There is an obvious maturity mismatch problem in the Fed's balance sheet, with a high proportion of long - term assets. After the end of the balance - sheet reduction, the Fed may increase short - term Treasury bond holdings to optimize the maturity matching [6][119]. - The ON RRP balance has significantly declined and is approaching exhaustion, and the TGA scale is still below the average in recent years. If the Fed continues to shrink its balance sheet, the ON RRP may not effectively hedge liquidity fluctuations, and bank reserves may face downward pressure. The Fed may restart "reserve - management bond purchases", which is beneficial to short - duration assets [6]. Summary by Directory 1. Fed Decoded: History, Organization, and Decision - Making Framework 1.1 Fed Historical Context - The evolution of the Federal Reserve reflects continuous innovation and change in monetary policy in response to different economic crises. In 2025, it returned to the "Flexible Inflation Target" (FIT) framework, aiming to more strictly anchor the 2% inflation target while retaining flexibility in responding to the employment market [14]. 1.2 Fed Organizational Structure - The Fed consists of the Board of Governors, 12 Federal Reserve Banks and their branches, and the Federal Open Market Committee (FOMC). The Board of Governors is the highest decision - making body, and the Federal Reserve Banks play an important role in operations. The FOMC is the core decision - making body for monetary policy [18][19]. - Currently, Trump is trying to influence the Fed's leadership composition through personnel arrangements. Although the Fed is trying to show unity, if Trump gets a majority on the board, his control over monetary policy will be further strengthened [28][29]. 1.3 Federal Open Market Committee (FOMC) - The FOMC holds eight regular meetings a year to discuss economic and financial conditions and formulate monetary policies. The post - meeting statement is the core document for understanding monetary policy trends [37]. - The voting records in the statement are important sources of information on the Fed's policy stance. There are different levels of influence within the Fed, with the chair having the strongest voice, the seven governors having permanent voting rights, and other members having different voting rights [39][40]. - The political power within the Fed's board is in a fragile balance. Trump's actions have tilted the policy towards the dovish side, and if he gets a stable majority, the implementation of monetary policy independence will face greater resistance [41][43]. 2. What Does the Return Mean? - The Return of "Fiscal Dominance" Pressure to FIT 2.1 The Origin of the "Dual Mandate" - After World War II, the Fed's monetary policy was restricted by the Treasury. In 1951, the "Treasury - Fed Agreement" marked the beginning of the Fed's independent formulation of monetary policy. In 1977, the Fed was given the "dual mandate" through legislation [47][52]. 2.2 The Birth of the Flexible Inflation Targeting - Since the 1990s, central banks around the world have increased policy transparency. In 2012, the Fed's "Flexible Inflation Targeting" (FIT) framework was formally established, with a long - term inflation target of 2% [56][57]. 2.3 Addressing the Challenge of Long - Term Low Inflation: The Formation and New Consensus of the FAIT Framework - In 2020, the Fed introduced the FAIT framework to deal with the long - term low - inflation and zero - lower - bound dilemma. Its core idea is to allow inflation to moderately exceed 2% for a period to compensate for previous periods of low inflation [58][59]. 2.4 Framework Adjustment: Return from FAIT to FIT - In 2025, the Fed returned to the FIT framework. The FAIT framework failed to control inflation during the pandemic, and the return to FIT aims to strengthen the Fed's credibility in inflation targeting and ease market inflation expectations [62][66]. - The Fed may be facing the trend of "fiscal dominance" again, but it needs to maintain a certain degree of independence on the surface [67][68]. 3. Is the End of Balance - Sheet Reduction Near as ON RRP Approaches Exhaustion? 3.1 Understanding the Fed's Price - Based Tools - The Fed's price - based tools form an "interest rate corridor" system to keep the market interest rate within the target range. The main tools include the Federal Funds Rate (FFR), Interest Rate on Reserve Balances (IORB), Overnight Reverse Repurchase Agreement (ON RRP), Discount Rate, and Standing Repo Facility (SRF) [81][86][100]. - The IORB and ON RRP form a "double - floor" system to absorb excess liquidity. The ON RRP is the "hard floor" of the interest rate corridor, and the IORB is the "soft ceiling" of the Effective Federal Funds Rate (EFFR) [91][92][99]. 3.2 Understanding the Fed's Balance Sheet - The Fed's balance sheet has expanded significantly due to quantitative easing policies during the global financial crisis and the COVID - 19 pandemic. There is a maturity mismatch problem, with a high proportion of long - term assets [108][119]. - The Fed's liabilities mainly include currency, the Treasury General Account (TGA), reserves, and reverse repurchase agreements. The Fed may adjust its securities holdings by increasing short - term Treasury bonds to optimize the maturity matching [115][119]. 3.3 Will Balance - Sheet Reduction Be Suspended as ON RRP Is Exhausted? - Since June 2022, the Fed has been reducing its balance sheet. The decline in the ON RRP balance is the main manifestation of the liability reduction, and bank reserves have remained relatively stable. Currently, the reserve market is still in an abundant state, and the Fed may restart "reserve - management bond purchases" [120]. 4. What to Expect After Balance - Sheet Reduction? - "Reserve - Management Bond Purchases" May Restart - The Fed may restart "reserve - management bond purchases" by increasing short - term Treasury bond holdings to maintain sufficient reserves, which can also optimize the balance - sheet structure and support the demand for short - term Treasury bonds, benefiting short - duration assets [6].

Core Viewpoint - The Federal Reserve, under Powell's leadership, has shifted its monetary policy framework from "Flexible Average Inflation Targeting" (FAIT) to "Flexible Inflation Targeting" (FIT), reflecting the need to adapt to changing economic conditions and persistent inflation challenges [1][7][10] Group 1: Historical Context and Policy Evolution - In the 1970s, the U.S. faced high inflation rates, prompting then-Fed Chair Volcker to raise interest rates to 20%, which ultimately led to a significant GDP contraction [1] - Powell's initial response to the pandemic-induced inflation was slow, as he believed the inflation surge would be temporary, a view shared by many analysts at the time [2][3] - By mid-2021, it became clear that inflation was not temporary, leading to a shift in policy starting in November 2021, culminating in aggressive rate hikes beginning in March 2022 [2][6] Group 2: New Monetary Policy Framework - The new FIT framework emphasizes a 2% inflation target while allowing for proactive measures in response to inflation risks, moving away from the previous focus on employment shortfalls [7][8] - Key modifications in the new framework include the removal of commitments to overshoot inflation targets and a more flexible approach to policy adjustments based on real-time data [8][11] - The framework aims to enhance the Fed's responsiveness to inflationary pressures while acknowledging the complexities of the current economic landscape, including supply chain disruptions and geopolitical factors [3][5][10] Group 3: Legacy and Future Implications - Powell's tenure is marked by significant changes in the Fed's approach, including the modernization of its toolkit and the institutionalization of regular policy reviews [9][10] - The new framework is expected to lead to a world characterized by moderate inflation, higher neutral interest rates, and frequent supply shocks, with a stronger commitment to maintaining the 2% inflation target [10][11] - The effectiveness of the new monetary policy framework will be tested in the evolving economic environment, with Powell's legacy likely to be evaluated based on its long-term impact [11][12]

Core Viewpoint - The Federal Reserve, under Powell's leadership, has shifted its monetary policy framework from "Flexible Average Inflation Targeting" (FAIT) to "Flexible Inflation Targeting" (FIT), reflecting the need to adapt to changing economic conditions and persistent inflation challenges [2][10][11]. Group 1: Historical Context and Policy Evolution - In the 1970s, high inflation in the U.S. reached 13.3%, prompting then-Fed Chair Volcker to raise interest rates to 20%, which ultimately led to a GDP contraction from 5.5% in 1978 to -1.8% in 1982 [2]. - Powell's tenure has seen a significant inflation surge post-pandemic, with the Fed's initial response being slow, as they underestimated the persistence of inflation driven by supply chain disruptions and demand recovery [4][5]. - The Fed's previous framework, established in 2020, was designed for low inflation and low interest rates, which became irrelevant as inflation surged to levels not seen in decades [7][8]. Group 2: New Monetary Policy Framework - The transition to FIT involves a more stringent approach to inflation targeting, reinstating the 2% inflation goal while allowing for proactive measures in response to inflation risks [10][11]. - Key modifications in the new framework include the removal of references to "employment shortfalls," allowing for preemptive actions against rising inflation, and a commitment to regular evaluations of the policy framework every five years [10][11]. - The FIT framework emphasizes a more generalized policy response, moving away from the low-rate world assumptions, and acknowledges uncertainties related to tariffs, supply chains, and neutral interest rates [10][11]. Group 3: Legacy and Future Implications - Powell's legacy may include the formal closure of the FAIT framework, the modernization of the Fed's toolkit, and the institutionalization of policy reviews, which are seen as sustainable assets for future monetary policy [13][14]. - The new framework aims to establish a more robust inflation anchor while allowing for flexibility in response to economic shocks, with expectations of a world characterized by moderate inflation and higher neutral rates [15][16]. - The Fed's approach is shifting towards a more data-driven model, focusing on leading indicators and allowing for timely adjustments to monetary policy, which reflects lessons learned from the pandemic era [16].

Core Viewpoint - The article discusses the evolution of the Federal Reserve's monetary policy under Powell, highlighting the transition from the Flexible Average Inflation Targeting (FAIT) to the Flexible Inflation Targeting (FIT) framework, emphasizing the need for a more responsive approach to inflation management in the post-pandemic economy [1][5][6]. Summary by Sections Historical Context - In the 1970s, the U.S. faced high inflation rates, prompting then-Fed Chair Volcker to raise interest rates to 20%, which led to a significant GDP decline from 5.5% in 1978 to -1.8% in 1982 [1]. - Powell's tenure has seen unprecedented inflation levels, with initial misjudgments about the persistence of inflation following the pandemic [1][2]. Inflation Dynamics - The "transitory inflation" narrative was widely accepted, with expectations that supply issues would resolve and demand would shift from goods to services, thus lowering inflation [2]. - By mid-2021, this assumption weakened as inflation spread from goods to services, indicating that high inflation was not a temporary phenomenon [2][3]. Policy Adjustments - Recognizing the need for a strong policy response, Powell began tightening financial conditions in late 2021, culminating in aggressive interest rate hikes starting in March 2022 [3][4]. - The Fed's initial framework, designed for low inflation and interest rates, became inadequate in the face of rising inflation post-pandemic [4][5]. New Monetary Policy Framework - The transition to FIT from FAIT reflects a shift in focus, reinstating the 2% inflation target while allowing for proactive measures against inflation risks [6][7]. - Key modifications in the new framework include the removal of references to employment shortfalls, a regular five-year review process, and a broader risk assessment approach [6][8]. Legacy and Future Outlook - Powell's legacy may include a more adaptable monetary policy framework that emphasizes timely responses to inflation, with expectations of a future characterized by moderate inflation and higher neutral interest rates [7][9]. - The new framework aims to enhance the Fed's responsiveness to inflationary pressures, moving towards a model that prioritizes early action based on real-time data rather than waiting for traditional indicators [9].

Core Viewpoint - The article discusses the evolution of the Federal Reserve's monetary policy under Powell's leadership, particularly the shift from the "Flexible Average Inflation Targeting" (FAIT) to the "Flexible Inflation Targeting" (FIT) framework, reflecting the changing economic conditions and the need for a more responsive policy approach [1][7][11] Group 1: Historical Context and Policy Evolution - In the 1970s, the U.S. faced high inflation, prompting then-Fed Chair Volcker to raise interest rates to 20%, which led to a significant GDP decline [1] - Powell's initial response to the COVID-19 pandemic was slow, as he underestimated the persistence of inflation, which surged unexpectedly [2][3] - The Fed's initial belief in "transitory inflation" was widely accepted, but by mid-2021, it became clear that inflation was not temporary, leading to a tightening of monetary policy starting in November 2021 [2][6] Group 2: New Monetary Policy Framework - The Fed's new framework, FIT, emphasizes a 2% inflation target while allowing for more flexibility in response to economic conditions, moving away from the previous FAIT approach [5][7] - Key modifications in the new framework include the removal of references to "employment shortfalls," allowing for preemptive actions against rising inflation risks [7][8] - The FIT framework aims for a more generalized policy response, acknowledging the complexities of the current economic environment, including supply chain disruptions and geopolitical tensions [8][10] Group 3: Legacy and Future Implications - Powell's legacy includes the formal transition to FIT, modernizing the Fed's toolkit, and institutionalizing regular reviews of monetary policy [9][10] - The new framework is expected to lead to a world characterized by moderate inflation, higher neutral interest rates, and frequent supply shocks, with a stricter adherence to the 2% inflation target [10][11] - The Fed's approach is shifting towards a more proactive stance, utilizing real-time data to inform decisions rather than waiting for lagging indicators [11]

Core Viewpoint - The annual Jackson Hole global central bank conference is taking place from August 21 to 23, with Federal Reserve Chairman Jerome Powell's speech being a focal point. Analysts suggest that Powell is unlikely to provide clear guidance on interest rate cuts, and if any guidance is given, it may lean towards a hawkish stance [1][2]. Group 1: Labor Market and Inflation Risks - The current monetary policy of the Federal Reserve faces a dilemma, with uncertainty regarding the labor market's deterioration and accumulating inflation risks due to tariffs increasing corporate costs [2][3]. - Powell's views on the labor market and inflation risks are crucial, as his perception of whether the labor market has "cooled to policy goals" will directly impact the necessity for rate cuts [2][3]. - The U.S. July non-farm payroll data was significantly below market expectations, leading to a market consensus that the Fed would begin cutting rates in September, with expectations of three cuts this year [2][3]. Group 2: Market Reactions and Predictions - Market sentiment appears to be preparing for hawkish signals from Powell, with the S&P 500 index declining for five consecutive trading days, particularly in the tech sector [7]. - If Powell's speech leans towards a dovish tone, confirming a potential rate cut in September, it could alleviate market concerns and boost the stock market. Conversely, a cautious or hawkish stance could trigger a new wave of selling [7]. - Historical data indicates that the S&P 500 index has averaged a 0.9% increase in the five trading days surrounding past Jackson Hole meetings, suggesting that the market often gains certainty from the Fed Chair's remarks [7]. Group 3: Dollar and Commodity Impacts - Powell's emphasis on inflation pressures could lead to a stronger dollar and higher U.S. Treasury yields, while a dovish stance might weaken the dollar [7][9]. - Gold prices are currently fluctuating with the dollar's movements, and if Powell adopts a dovish tone, gold and other safe-haven assets may strengthen in the following days [8].