On Thursday, John Williams, the President of the Federal Reserve Bank of New York, who is known as the "third in command" of the Federal Reserve and has a permanent voting right on the FOMC, delivered a speech in which he warned that if the data shows that the Federal Reserve needs to raise interest rates to achieve its goals, then the Federal Reserve will do so.
However, Williams emphasized that the aforementioned "interest rate hike" is not the baseline scenario he anticipates. He reiterated that the Federal Reserve's monetary policy is in a good position and also indicated that he does not feel there is an urgency to cut interest rates, although a reduction is ultimately inevitable. Economic data will determine the timing of any rate cut.
It is worth noting that Williams' latest speech appears significantly more hawkish than his earlier comments from the past week. In his latest speech, he focused on the upside risks of inflation. In stark contrast, Williams stated a few days ago that he does not believe the recent U.S. inflation data is a turning point, and he emphasized the prospects of interest rate cuts, saying, "If inflation continues to gradually fall, the Federal Reserve may start cutting interest rates this year."
Following Williams' mere mention of the possibility of raising interest rates, the brief rebound in the U.S. Treasury market came to an abrupt halt, and the S&P and Nasdaq indices also gave up their morning gains and turned negative:
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The U.S. two-year Treasury yield climbed 5 basis points to nearly 4.99%, approaching the high end of the recent range. This week, the two-year U.S. Treasury yield, which is sensitive to monetary policy, once touched a level slightly above 5%, the highest since November last year.
The U.S. 10-year Treasury yield rose by more than 5 basis points during the session, reaching around 4.653% in the early hours of Friday, Beijing time.
Swap market pricing indicates that the Federal Reserve will cumulatively cut interest rates by 38 basis points at the December policy meeting, while as of Wednesday's close, the cut was 43 basis points; the market still expects the Federal Reserve's November policy meeting to initiate the first 25 basis point rate cut of the year.
The market-implied probability of an interest rate hike remains close to zero. However, in the interest rate options market, protection against rate hike scenarios has become popular.
The S&P and Nasdaq have fallen for five consecutive days.
The "shift" in Williams' speech occurred after Federal Reserve Chairman Powell's public speech this week. Powell said this week that the lack of further progress in inflation suggests that it might be appropriate for high interest rates to remain in place for a longer period. The "new Fed mouthpiece" commented that there has been a significant shift in the Federal Reserve's outlook, which seems to have dashed hopes that they might "preemptively" cut interest rates.The Wall Street Journal website mentioned that this week, as Powell dampened market expectations for rate cuts, the U.S. stock market showed considerable resilience, one of the main reasons being, as the "new Fed mouthpiece" said, Powell implied that if inflation continues to be higher than 2%, interest rates might be kept at higher levels for a longer period. This means that if inflation is slightly higher than expected, the possibility of additional rate hikes is not great. Therefore, compared with Powell's speech, the "third in command at the Fed" mentioning rate hike scenarios is relatively more damaging to the market.
The aforementioned analysis article also mentioned that the market trend on the day of Powell's speech was relatively stable, which is related to the fact that several high-ranking officials at the Fed have already given the market a "heads-up." In addition, corporate earnings have replaced monetary policy as the main driver of fluctuations in the U.S. stock market.
After the U.S. stock market closed on Thursday, Atlanta Fed Chairman Bostic also stated that he is open to rate hikes if U.S. inflation rises. This means that an increasing number of Fed officials are mentioning the scenario of "rate hikes," which is quite different from the previous few months.
Bostic also said on the same day that the Fed's current interest rate policy is restrictive. The U.S. economy is slowing down, but at a slow pace. Wage growth is faster than inflation. Inflation is on the right track to return to the target of 2%. The Fed is not in a hurry to achieve a return of inflation to 2% and can remain patient.
It should be noted that as the Fed's overall attitude turns hawkish, U.S. Treasury yields have soared recently, and Wall Street warns of a short-term "return to the 5% era." Vanguard believes that if the 10-year U.S. Treasury yield breaks through the 4.75% threshold, it may trigger a large-scale sell-off. Judging from the latest trend in U.S. Treasury bonds, they are already at this warning line.
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