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

Odaily reports that CICC Research notes the Federal Reserve kept interest rates unchanged at the July meeting, but internal hawkish sentiment strengthened further, with three voting members supporting a 25 basis point rate hike. We believe the biggest change at this meeting was not the 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, against a backdrop of inflation persistently exceeding targets, this approach could 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 beginning to price in higher long-term inflation and policy risks. Looking ahead, we believe 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 rates will rise further, and risk assets will face greater adjustment pressure. (Jin Shi)