CICC: Waller Attempts to "Outsource" Some Tightening Functions, Could Lead Market to Price in the Fed Acting Too Late

Odaily reported that, according to a CICC research report, the Federal Reserve kept interest rates unchanged at its July meeting, but the internal hawkish stance has further strengthened, with three voting members supporting a 25-basis-point rate hike. We believe the biggest change at this meeting was not the interest rate decision, but rather Waller’s attempt to reduce policy intervention, relying more on a spontaneous rise in market interest rates to tighten financial conditions, thereby "outsourcing" some tightening functions to the market. However, with inflation persistently above target, this approach can easily undermine market confidence in the Fed's policy credibility. After the meeting, long-end U.S. Treasury yields rose sharply, and the curve steepened noticeably, possibly reflecting investors starting to price in higher long-term inflation and policy risks. Looking ahead, we believe that if employment or inflation data exceed expectations, the market will not only further raise expectations for a September rate hike but may also price in the risk of the Fed "acting too late." Long-end interest rates will rise further, and risk assets will also face greater adjustment pressure. (Jin Shi)