Report Industry Investment Rating No relevant information provided. Core Viewpoints of the Report - The US economy shows signs of "stagflation in its early form" with a co - existence of declining growth and sticky inflation. The Fed is in a dilemma of "cutting interest rates to boost inflation or not cutting to suppress growth". Historical experience indicates that the degree of inflation - expectation anchoring, the depth of the employment gap, and the reversibility of supply - side shocks are the three core variables for judging monetary policy during stagflation. [2][4] - The US Treasury yields have experienced a significant "V - shaped" trend. In the short - term, there is high uncertainty, but the structural support for the bear - steepening pattern still exists. The current strategy should focus on controlling duration, and consider extending duration or engaging in steepening trades after clear signals of curve steepening emerge. [2][4] Summary by Relevant Catalogs 1. Stagflation Background and Monetary Policy 1.1 Macro Picture: The Divergence between Growth and Inflation - In early 2026, the US economy entered a delicate and dangerous phase. From the demand side, consumer confidence has been weakening since Q4 2025, and corporate capital expenditure growth has declined. The tightening tariff policy has systemically suppressed trade activities, and the downward pressure on the real economy has spread from expectations to data. The February non - farm payroll data hit a phased low, increasing market concerns about growth. [7] - At the same time, inflation has not cooled down as growth expectations were revised downward. The core PCE remained in the 2.6% - 2.8% range at the end of 2025, with particularly sticky service - sector inflation. The ongoing tariff policy is adding cost - push inflation pressure, and institutions estimate it will contribute 0.25 - 0.75 percentage points to inflation in 2026. The US economy shows "stagflation in its early form", putting the Fed's monetary policy in a dilemma. [7] 1.2 Historical Lessons: Insights from Three Cases - Three historical cases point to the core variable of inflation - expectation anchoring for monetary policy in a stagflation environment. When inflation expectations are anchored, the market, enterprises, and residents have a stable long - term inflation expectation, which helps to prevent the formation of a price - wage spiral and makes monetary policy more effective. Once inflation expectations become unanchored, inflation can turn into an endogenous self - fulfilling process, and the effectiveness of monetary policy will decline significantly. [8][10] - **1970s: The Painful Cost of Policy Unanchoring** - After the 1973 oil crisis, the US economy entered supply - side shock - induced stagflation. Fed Chairman Arthur Burns cut interest rates rapidly to deal with the recession, which led to soaring inflation and damaged the Fed's policy credibility. His "Stop - Go Policy" was widely criticized. The inflation rate briefly fell but then soared again after the 1979 oil crisis. The root cause was his misjudgment of inflation and the political intervention that undermined the Fed's independence, leading to unanchored inflation expectations. [11][12] - Paul Volcker took over in 1979 and implemented extreme tightening measures. Although it pushed the US economy into a severe recession, it controlled inflation and re - anchored long - term inflation expectations, rebuilding the Fed's credibility. [13] - **1990 - 1991: Successful Transition after Anchoring** - In the 1990s, the US economy faced a combination of recession and inflation. However, due to the long - term inflation expectations being deeply anchored at a low level after the Volcker era, Fed Chairman Greenspan was able to cut interest rates from 9.75% to 3% from 1989 to 1992 without triggering a secondary inflation rebound. The economy recovered in Q3 1991, and inflation continued to decline moderately. This case shows that in a stagflation environment, interest - rate cuts do not necessarily lead to inflation out - of - control if inflation expectations are well - anchored and supply - side shocks are reversible. [14][17] - **2022 - 2023: The Modern - Day Priority Order** - In 2022, the Fed faced a mixed - type inflation caused by supply - side shocks and over - heated demand. Despite signs of economic slowdown, the Fed chose to raise interest rates aggressively to prioritize inflation control, which was an application of the 1970s lessons. When the supply - side shock subsided and demand cooled, inflation declined faster than expected, providing partial support for the view that tariffs are a one - time price - level shock. However, this still depends on whether inflation expectations remain anchored. [19] - **Three Core Variables for Judging Monetary Policy during Stagflation** - The degree of inflation - expectation anchoring: It is the primary judgment dimension. If expectations are anchored, there is policy room; if unanchored, the Fed faces a dilemma regardless of interest - rate cuts. [24] - The depth and speed of the employment gap: A sharp deterioration in the unemployment rate creates strong political pressure for policy easing and is often a trigger for policy compromise. [24] - The reversibility of supply - side shocks: If inflation comes from reversible exogenous shocks, the policy tolerance is relatively higher; if it evolves into a wage - price spiral, the tolerance cost rises sharply. [24] 2. Review of US Treasury Yield Trends: V - shaped Oscillation and the Elimination of Rate - Cut Expectations - From early February to mid - March 2026, US Treasury yields experienced a significant "V - shaped" trend with a phased differentiation. [25] - **First Stage (Early February - End of February)**: Yields declined across the board, and the curve flattened slightly. The decline was driven by increased concerns about US economic growth and strengthened rate - cut expectations. The long - end yields declined slightly more than the short - end, and the 2 - 10 spread narrowed slightly, reflecting the market's concerns about growth suppressing the term premium to some extent. [25] - **Second Stage (Early March - Mid - March)**: Yields rebounded rapidly, with the short - end leading the increase. The short - end increase was more significant than the long - end, and the 2 - 10 spread narrowed. This was due to the rapid decline of rate - cut expectations as a result of higher - than - expected inflation data in February and the continuous advancement of tariff policies. [26] - The net change in yields for the whole month was almost flat, but the "V - shaped" oscillation reflected the market's rapid re - evaluation of growth and inflation expectations, indicating significant pricing differences in the current stagflation environment. [27] - Three key events influenced the yield trends: weak consumer confidence and lower corporate profit expectations in mid - February led to a decline in yields; the advancement of tariff policies at the end of February triggered the re - pricing of inflation and the rebound of yields; the "weak growth + strong inflation" data in early March completely eliminated the market's expectation of near - term rate cuts, causing a sharp increase in yields. [30] 3. US Treasury Pricing Mechanism, Curve Outlook, and Strategy Implications - **Pricing Mechanism**: By splitting the nominal interest rate into real interest rate and break - even inflation rate (BEI), the current nominal interest rate pricing structure is relatively balanced. The 10 - year BEI has slightly increased, and the 10 - year real interest rate has also slightly rebounded. The 5 - year forward inflation expectation has declined to 2.15%, indicating a relatively mild market expectation of medium - term inflation. However, the lag in the inflation transmission effect of tariff policies makes the stability of inflation expectations uncertain. [31] - **Term Premium**: The 10 - year term premium showed a "V - shaped" trend, rising in March. The current level is lower than the January high, but the recent rebound indicates that the market's demand for compensation for holding long - term bonds is increasing, restricting the downward space for long - term yields. [32] - **Curve Outlook**: The structural support for the bear - steepening pattern still exists. The short - end's upward momentum is weakening as the decline in rate - cut expectations has been largely priced in, while the long - end is under pressure from the increase in term premium and fiscal supply. If tariff - related inflation is confirmed in Q2 data, the curve - steepening logic will be strengthened; if inflation data unexpectedly decline and rate - cut expectations revive, the curve may flatten briefly, but the long - end will still be restricted by fiscal supply. [33] - **Strategy Implications**: In the current stagflation environment, it is recommended to focus on controlling duration and reducing the portfolio's interest - rate risk exposure. The relative value of TIPS compared to nominal bonds should be evaluated based on real - interest - rate trends. For curve - trading strategies, it is not advisable to establish directional curve positions at present. After the tariff - inflation transmission path becomes clearer and the curve - steepening signals are more definite, consider engaging in 2 - 10 or 2 - 30 steepening trades. [34]

Core Viewpoint - The former Deputy Governor of the Bank of Japan, Masayoshi Takeda, emphasized the need for the central bank to anchor long-term inflation expectations around 2% and highlighted the potential for inflation to slow down as cost-push factors dissipate, aiding in achieving real wage growth by 2026 [1][4]. Group 1: Economic Outlook - Takeda stated that if conditions improve, Japan's output gap could narrow, leading to positive economic signs [2][5]. - He warned of unique risks associated with the inflationary era, such as rising interest rates, and called for maintaining market confidence in Japan's fiscal policies [2][5]. Group 2: Policy Recommendations - Takeda expressed the hope that the Bank of Japan would guide policies to stabilize medium- to long-term inflation expectations at around 2% [3][6]. - He noted that the government should not overlook existing basic balance targets while focusing more on reducing the debt-to-GDP ratio [3][6]. - This stance contrasts with his previous suggestion to abandon the primary balance target in favor of focusing on the debt-to-GDP ratio, which critics argued could weaken Japan's commitment to debt control [3][6].

Core Viewpoint - The Federal Reserve Governor Waller advocates for interest rate cuts in the upcoming meetings, emphasizing the need to act before the labor market declines [1] Group 1: Interest Rate Outlook - Waller expects multiple interest rate cuts in the coming months [1] - He believes that the inflation expectations are anchored and that the 10-year U.S. Treasury yield has been somewhat stabilized [1] - The pace of interest rate cuts does not need to follow a fixed rhythm [1] Group 2: Inflation and Economic Indicators - Waller predicts that inflation rates will begin to return to 2% within 6-7 months [1] - He asserts that tariffs will not lead to long-term inflation [1] - Other colleagues at the Federal Reserve have a much higher neutral interest rate expectation [1]

Core Viewpoint - The Federal Reserve has updated its monetary policy framework to address significant changes in the economic environment over the past five years, including rising inflation pressures and a shift away from the ultra-low interest rates seen during the COVID-19 pandemic [1][4]. Group 1: Policy Framework Changes - The new framework marks a departure from the special policy framework adopted in 2020, removing references to low interest rate environments and returning to a flexible inflation targeting approach [2][4]. - The previous framework allowed inflation to exceed the 2% target to compensate for periods of underperformance, a strategy that was quickly undermined by the pandemic-induced inflation surge [2][3]. Group 2: Inflation Expectations - The updated framework emphasizes the importance of anchoring long-term inflation expectations, reaffirming the 2% inflation target and the Fed's commitment to taking decisive action to maintain this stability [3][7]. - The Fed believes that a stable long-term inflation rate of 2% promotes price stability and moderate long-term interest rates, enhancing its ability to support maximum employment during significant economic shocks [3][7]. Group 3: Economic Environment Adaptation - The new framework reflects a reassessment of the current economic environment, acknowledging that the pandemic and subsequent stimulus measures have led to the most severe inflation pressures in decades, fundamentally altering the monetary policy landscape [4][5]. - Analysts suggest that, despite a significant easing of inflation pressures and the Fed's plans to lower interest rates, it is unlikely that rates will return to the ultra-low levels seen before the pandemic due to structural changes in the economy and increased government borrowing [5][6]. Group 4: Review and Transparency - The Federal Open Market Committee (FOMC) intends to review these principles annually in January and conduct a comprehensive public assessment of its monetary policy strategy approximately every five years [5][8]. - The FOMC aims to clearly communicate its monetary policy decisions to reduce economic and financial uncertainty, thereby enhancing the effectiveness of its policies [5][6].

Group 1 - The average wage increase for Japan's fiscal year 2025 is 5.25%, marking the highest growth in 34 years, surpassing the previous year's 5.10% [2][3] - The strong wage growth reflects a tight labor market, with companies facing pressure to recruit and retain employees, which may lead to a more hawkish stance from the Bank of Japan in future monetary policy meetings [2][3] - The information and publishing sector saw the highest wage increase at 5.65%, indicating a significant shift from long-standing wage stagnation [3] Group 2 - Small business employees experienced a wage increase of 4.65%, the largest in 33 years, narrowing the wage gap with large enterprises to 0.6 percentage points [4] - Approximately 70% of employees work in small and medium-sized enterprises, making their wage growth crucial for national wage trends [4] - The government has committed to providing cash subsidies to alleviate inflation burdens and aims to increase average annual salaries by 1 million yen by fiscal year 2030 [5]

Group 1 - The core focus of the Federal Reserve's monetary policy framework evaluation in 2025 includes summarizing lessons from the past five years, discussing improvements in communication methods, and assessing the effectiveness of the monetary policy framework [1][2][10] - The "Consensus Statement" established in 2012 set a 2% inflation target and has remained unchanged, emphasizing the Fed's commitment to its dual mandate [2][9] - The need for periodic updates to the monetary policy framework is highlighted, as economic structures evolve over time, necessitating adjustments in strategies, tools, and communication methods [2][3] Group 2 - The transition from "average inflation targeting" back to "traditional inflation targeting" is discussed, with the recognition that regular evaluations of economic structural changes are essential [3][6] - The experience of living in a "new normal" characterized by low rates and low inflation since the 2008 financial crisis is noted, with the federal funds rate being stuck at the zero lower bound for an extended period [4][5] - The importance of anchoring inflation expectations at an appropriate low level is emphasized, as it plays a crucial role in maintaining price stability while achieving full employment [9][10] Group 3 - The Fed plans to complete the review of the "Consensus Statement" revisions in the coming months, focusing on the 2020 updates and the latest economic understanding [10][11] - There is a consensus among participants regarding the expression of "employment shortfall," indicating a shift in focus from merely preventing inflation to assessing employment conditions [5][10] - The need for improved communication regarding predictions, uncertainties, and risks is acknowledged, with an emphasis on the importance of effective communication in complex economic environments [11]

Core Viewpoint - The Federal Reserve Governor, Christopher Waller, emphasized that the central bank has gained significant public trust, which has helped anchor inflation expectations [1] Group 1 - The Federal Reserve's efforts have led to a stabilization of inflation expectations among the public [1] - Waller noted that the trust gained is crucial for effective monetary policy implementation [1] - The anchoring of inflation expectations is seen as a positive sign for the economy [1]