CICC Says Fed Held Rates in July as Hawkish Pressure Grew
CICC noted that the Federal Reserve left interest rates unchanged at its July meeting, but the hawkish camp within the Committee strengthened further, with three voting members backing a 25-basis-point rate hike. In CICC’s view, the biggest change in this meeting was not the rate decision itself, but Wosh’s attempt to reduce policy intervention and rely more on market rates rising on their own to tighten financial conditions, effectively “outsourcing” part of the tightening function to the market. However, against a backdrop of inflation remaining above target, this approach could easily weaken market confidence in the credibility of the Fed’s policy. After the meeting, long-end U.S. Treasury yields rose sharply and the yield curve steepened noticeably, which may reflect investors beginning to price in higher long-term inflation and policy risks. Looking ahead, CICC believes that if employment or inflation data come in above expectations, markets will not only further increase expectations for a September rate hike, but may also price in the risk that the Fed is acting “too late.” Further upside in long-term interest rates would also put greater pressure on risk assets to adjust.