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Three Fed members opposed the freeze and advocated for a rate hike...Middle East-triggered price uncertainty amplified
Wash reiterates 2% inflation target achievement...Bond market doubts commitment to inflation response
The U.S. Federal Reserve (Fed) maintained its benchmark interest rate at 3.50-3.75% annually on the 29th (local time).
However, with three members within the Fed advocating for a rate hike and opposing the freeze decision, it is interpreted as a de facto 'hawkish freeze' (preferring monetary tightening).
Financial markets, which had been betting on the Fed's imminent rate hike to counter inflation, were disappointed that Fed Chair Kevin Wash failed to persuasively explain the background of today's rate freeze, responding with a sell-off in both stocks and bonds.
Wall Street experts generally anticipated that the Fed would keep the benchmark interest rate unchanged ahead of this rate decision.
Wall Street's assessment was that the 0.4% month-over-month drop in the U.S. June Consumer Price Index (CPI) due to a sharp fall in oil prices gave the Fed more room to wait and observe developments.
Of course, with the resumption of military clashes between the U.S. and Iran this month, and threats to navigation in the Strait of Hormuz, a major international energy route, as well as the Red Sea route, international oil prices have rebounded sharply, and inflation risks still remain.
For this reason, traders betting on the direction of interest rates saw a certain possibility of a 'surprise hike' by the Fed ahead of today's rate decision.
Frank Flight, head of macro strategy at Citadel Securities, stated in a report on the 27th that "the market may be underestimating the extent of the Fed's hawkish shift," anticipating a potential surprise hike by the Fed at this meeting.
According to CME FedWatch, the interest rate futures market reflected a roughly one-third probability of the Fed raising rates at this meeting right before the decision. This was an unusually high probability, considering that traders' rate bets usually converge right before a monetary policy meeting.
Some bond market participants did not let their guard down until the end, believing there was a possibility that Chair Wash, who had emphasized his commitment to price stability, might implement a surprise rate hike without warning.
Although the 'surprise hike' scenario anticipated by some on Wall Street did not materialize, the fact that three Fed members voiced opinions for a rate hike in today's decision reflected that there was indeed a strong demand for rate increases within the Federal Open Market Committee (FOMC).
At this meeting, three members – Beth Hammack (Cleveland), Neel Kashkari (Minneapolis), and Lorie Logan (Dallas) – opposed the freeze decision, advocating for a 0.25 percentage point rate increase.
These three members had previously expressed dissenting opinions at the April FOMC meeting, stating that it was inappropriate to maintain the dovish language of 'additional adjustment' in the policy statement.
However, these three members, including Hammack, did not express dissenting opinions during the June FOMC's rate freeze decision, which passed unanimously at the time.
At today's press conference, Chair Wash reaffirmed his commitment to achieving the 2% inflation target, stating, "There is no soft inflation target; there is only one target, and that is 2%."
However, he merely reiterated the principle of responding to price stability without providing specific methodologies or action plans, which disappointed the market.
Robert Sokin, Chief U.S. Economist at asset management firm PGIM, told the Financial Times, "The biggest failure of this press conference was Chair Wash's inability to explain why he did not hike."
Chair Wash also said at today's conference, "The markets have been working with us to keep us honest and have tightened financial conditions between (the June-July FOMC) meetings," adding, "This has given us some comfort that the Fed has the ability and capacity to meet its objectives." Following Chair Wash's remarks that the market acted on its own to address inflation ahead of the Fed's response, which was 'comforting,' the bond market intensified its sell-off of long-term U.S. Treasuries.
The yield on 30-year U.S. Treasuries sharply rose by 0.11 percentage points to 5.21% immediately after the close of the New York stock market today (bond prices fell). This is the highest level in 19 years since July 2007, before the financial crisis.
The market still believes there is a high probability that the Fed will raise rates one or more times this year, but expectations for a September rate hike are lowering after today's FOMC meeting.
According to CME FedWatch, the interest rate futures market reflected an approximately 57% probability of the Fed raising rates by 0.25 percentage points or more in September after the close of the New York stock market today. This is significantly lower than the 76% from the previous day.
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