华尔街点评美联储决议：沃什欢迎市场代替「加息」？

Original Author: Ye Zhen

Original Source: Wall Street CN

The Federal Reserve kept interest rates unchanged at its July meeting. In this meeting lacking clear forward guidance, Fed Chair Walsh’s tacit approval of rising long-term yields became the market focus. Institutions generally believe this signals that the market's spontaneous tightening is replacing official rate hikes.

At the just-concluded FOMC meeting, the Fed decided to maintain the federal funds rate target range at 3.50%-3.75%. The statement saw minimal changes, but notably, three regional Fed presidents (Hammack, Kashkari, and Logan) cast dissenting votes, supporting a 25 basis point rate hike.

Walsh welcomed the market's spontaneous tightening of financial conditions, explicitly stating that although the Fed has done nothing over the past 42 days, the market has done a lot. Consequently, the U.S. Treasury yield curve steepened significantly. Short-term rates fell amid rising energy prices, while long-term rates climbed notably, with the 30-year yield briefly breaking above 5.20%.

Faced with continuously rising long-term Treasury yields, Walsh did not suppress them but instead argued that financial conditions have been proactively tightened by the market. This implies that as long as long-end rates remain high, the necessity for the Fed to actively hike rates will significantly decrease. Goldman Sachs, Barclays, and Nomura analyze that the Fed is tacitly allowing the bond market to substitute for official rate hikes. However, this strategy could also push long-term yields higher and plant risks of unanchored inflation expectations and increased future policy volatility.

A "Dovish" Pause Lacking Guidance

Goldman Sachs analyst David Mericle noted in a report that before the meeting, market expectations on whether the Fed would hike rates faced the greatest uncertainty in three decades, but the final outcome seemed somewhat anticlimactic. Goldman Sachs believes Walsh’s remarks at the press conference were generally dovish and intentionally avoided providing clear policy guidance to the market.

Despite the lack of direct guidance, Goldman Sachs extracted four core dovish signals from Walsh's statements.

First, Walsh deliberately downplayed AI-related price pressures, suggesting price increases in these areas might be independent of broader inflation trends. Second, when asked whether the recent rise in real interest rates indicated the market believed the Fed should hike, he attributed it to the economy's strong performance. Third, he repeatedly hinted that rising market interest rates could substitute for policy rate hikes. Fourth, Walsh believed that enhancing the Fed's credibility for achieving its inflation target could lower inflation more effectively by reducing inflation expectations, compared to directly suppressing demand through rate hikes.

Goldman Sachs expects that weaker core inflation data in the coming months will lead the Fed to keep rates unchanged for the remainder of 2026. Currently, the bond market prices about a 60% probability of a rate hike at the September FOMC meeting.

Core Focus: Market Spontaneous Tightening Replacing "Rate Hikes"

The most notable signal from this decision for Wall Street was Walsh's stance on the recent rise in bond market yields. Barclays and Nomura both highlighted in their reports that Walsh not only refrained from pushing back against rising long-term yields but welcomed them, strongly suggesting that rising market rates could substitute for actual Fed rate hikes.

Barclays pointed out that the Fed's own FRBUS model analysis shows that a sufficient rise in term premiums can substitute for a higher federal funds rate. Walsh explicitly stated at the press conference that the recent rise in nominal and real yields is one of the most significant moves in the past two decades. He attributed this to the economy's strong performance and praised market participants for "learning to play the ball, not the umpire," calling it a "healthy development."

Goldman Sachs also captured this nuance. When asked why the Fed paused despite a strong economy, Walsh directly responded that market rates "have not paused." He explicitly stated that although the Fed has done nothing over the past 42 days, the market has done a lot.

Nomura believes that Walsh's approach of treating tightened financial conditions as a substitute for policy represents a preference for "unfiltered" market signals. This also implies that as long as long-end rates remain elevated, the urgency for the Fed to actively pull the trigger on rate hikes is significantly reduced.

Rising Long-Term Yields and Inflation Expectation Risks

With the Fed partially "outsourcing" the task of tightening financial conditions to the bond market, Wall Street institutions are adjusting their investment strategies and wary of potential risks from unanchored inflation expectations.

Barclays believes that due to increased uncertainty in the policy reaction function, the threshold for a September rate hike is rising, but the threshold for further increases in long-end yields has lowered. The institution points out that the 30-year Treasury yield breaking above 5% is not a flash in the pan, and current yield levels have not yet fully priced in a rise in the neutral rate. Therefore, it maintains its investment recommendation for paying the 5-year forward Overnight Indexed Swap rate (5y5y SOFR).

Nomura, on the other hand, warns about the Fed's inflation credibility. Nomura notes that Walsh's persistently dovish lean and vague explanation of the policy reaction function could undermine the Fed's credibility in fighting inflation. This directly led to a jump in the 5-year forward breakeven inflation rate after the meeting.

Nomura warns that at the slightest sign of inflation stabilizing or the disinflation process stalling, markets might react more violently due to concerns over the Fed's credibility. This risk of long-term inflation expectations becoming unanchored could ultimately force hawkish members within the FOMC to adopt a more forceful response.