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 Insights - The probability of the federal funds rate reaching the "zero lower bound" (ZLB) in the next seven years is estimated at 9%, with current rate uncertainty exacerbating this risk [2] - Despite higher expected interest rates compared to the past decade, significant uncertainty remains, keeping the ZLB risk notable [2] - Empirical evidence suggests that changes in interest rate expectations are the primary drivers of ZLB risk [2] Historical Context - The Federal Reserve first lowered rates to the 0%-0.25% range during the 2008 financial crisis to stimulate economic recovery, maintaining this level for seven years [3] - Rates were again reduced to zero in response to the economic impact of the COVID-19 pandemic, lasting for two years [3] - Recent research indicates that the risk of returning to ZLB persists, influenced by complex economic conditions, geopolitical conflicts, and global economic sluggishness [3]

Core Viewpoint - The Federal Reserve cannot assume that its benchmark loan rate will not drop back to zero, with a long-term probability of 9% for this scenario [1][3]. Group 1: Research Findings - The probability of the federal funds rate reaching the so-called "zero lower bound" (ZLB) within the next seven years is estimated at 9% [1]. - The current high uncertainty surrounding interest rates has increased the risk of hitting the ZLB, similar to levels observed in 2018 [1][3]. - Empirical evidence suggests that changes in interest rate expectations are the main driver of ZLB risk [3]. Group 2: Historical Context - The Federal Reserve first lowered rates to the 0%-0.25% range during the 2008 financial crisis to stimulate the economy, maintaining this level for seven years [3]. - Rates were again reduced to zero during the COVID-19 pandemic and remained there for two years [3]. - There has been skepticism among policymakers and economists regarding whether post-pandemic inflation and economic growth indicate a departure from the ZLB risk, but recent research indicates that this risk still exists [3].

Core Viewpoint - The Federal Reserve's report indicates a 9% probability that the benchmark interest rate could drop to zero within the next seven years due to increased uncertainty in current interest rates [1] Summary by Relevant Sections - **Interest Rate Projections** - The report highlights that the Federal Reserve cannot assume that the benchmark loan rate will not reach zero at some point in the future [1] - Current data suggests that future interest rate expectations are higher compared to the past decade, but increased uncertainty poses significant risks of hitting the zero lower bound (ZLB) in the medium to long term [1] - **Historical Context** - The risk of reaching the zero lower bound is noted to be similar to levels observed in 2018, indicating a potential return to previous economic conditions [1]