The Fed's rate cut expectations are heating up, and weaker employment data has sparked liquidity expectations for 2026

CITIC Securities’ latest research report predicts that the Federal Reserve may cut interest rates by around 50 basis points in 2026. This forecast is based on the weak performance of the US labor market in December—non-farm payrolls increased by only 50,000, well below market expectations of 65,000. This signal is changing market expectations for the Fed’s policy and will directly impact global asset pricing logic.

Weak Employment Data and Rising Rate Cut Expectations

Data comparison and structural issues

According to CITIC Securities’ research, the US employment market in December exhibited two key problems:

More noteworthy is the structural characteristic of employment growth. The new jobs added in December were mainly concentrated in healthcare, education, and leisure/hospitality sectors, which are typically considered relatively low-end service jobs. This indicates that the growth momentum in the US labor market is weakening, and high-quality employment opportunities are struggling to increase.

From Data to Policy Expectations

Based on this weak employment phenomenon, CITIC Securities forecasts that the Fed may cut rates by about 50 basis points in 2026. What does this magnitude imply?

• 50 basis points equals 0.5 percentage points, representing a relatively moderate rate cut
• The phrase “around” indicates some flexibility in the forecast, with actual cuts possibly between 40-60 basis points
• This reflects a relatively dovish market expectation for the Fed’s policy shift, rather than an aggressive easing

Potential Market Impact of Rate Cut Expectations

Changes in Liquidity Environment

The expectation of rate cuts itself will alter asset allocation logic. Once the Fed confirms a rate cut path, the following changes may occur:

• The US dollar may weaken relative to other currencies, benefiting USD-denominated emerging market assets
• Yields on low-risk assets (such as US Treasuries) may decline, increasing attractiveness of risk assets
• Global liquidity conditions could improve, supporting high-risk assets including cryptocurrencies

The Timing is Critical

The forecast at this point (January 2026) is crucial. If the Fed indeed begins rate cuts within the year, the timing will determine the strength of market reactions. Earlier rate cuts could provide more sustained liquidity support, while later cuts might face more uncertainties.

Key Points to Watch Moving Forward

This expectation is not set in stone. Future focus should include:

• Whether US employment data in January continues to be weak (which would further reinforce rate cut expectations)
• The latest statements from Fed Chair Powell (whether he confirms the rate cut direction)
• The trajectory of inflation data (which could influence the magnitude of rate cuts)
• Changes in global economic growth forecasts

Summary

CITIC Securities’ expectation of a 50 basis point rate cut reflects a judgment of the weakening US employment trend. The below-expected non-farm payrolls in December are not just a statistical figure but also a significant factor that has shifted market expectations for the Fed’s policy direction. This change in expectations will gradually influence global asset prices, including the performance of cryptocurrencies. The key is to observe whether this expectation will be further confirmed by subsequent data and whether the Fed’s actual actions will follow suit.