Fed's Interest Rate Hints End... IBM VP: "Wall Street Re-enters a Market Without Clear Answers"

▲ U.S. Federal Reserve (Fed)/AI-generated image

A diagnosis has emerged that Wall Street is returning to a 'market without clear answers' as the Federal Reserve (Fed) withdraws the friendly advance guidance it had provided since 2008.

Gary Cohn, Vice President of IBM, stated in an interview with Bloomberg on August 3 (local time) that the new Fed leadership is departing from the practice of pre-announcing policy directions and returning to past methods. He said, "The market has become accustomed to getting the answers before taking the test," and that the Fed is trying to break the market's excessive reliance. He explained that since 2008, the Fed had foreshadowed interest rate decisions and policy changes weeks or months in advance, but the new leadership is pressuring market participants to assess risks themselves.

Cohn analyzed that rising long-term interest rates are taking over the Fed's tightening role. The spread between the U.S. 2-year and 10-year Treasury yields moved from minus 20 basis points to plus 40 basis points in less than a year. This means the yield curve has steepened by a total of 60 basis points. He explained that "the market is doing the Fed's job," and that rising 10-year and 30-year yields are increasing the cost of financing in the real economy for things like mortgage loans, auto loans, and student loans.

The AI investment race was also identified as a factor driving up long-term interest rates. Cohn stated that the demand for corporate funding for AI computing and data center construction overlapped with the continuously increasing issuance of U.S. Treasury bonds by the Treasury Department. He added that related bond issuance could amount to an additional $1 trillion, and that this large supply is pushing up long-term bond risk premiums and interest rates.

Market instability is now at a stage where it cannot be explained by interest rates alone, according to the assessment. War, oil prices, tensions in the Japanese financial market, AI facility investment, and leverage issues of some hedge funds are all intertwined simultaneously. Large tech companies have shifted from a structure where massive free cash flow was invested in dividends and share buybacks to companies directly building data centers and equipment. Cohn pointed out that the very situation where some companies emphasize maintaining positive free cash flow in their earnings announcements is a significant change from the past. U.S. consumption also shows a clear polarization, with high-income earners continuing strong spending while low-income earners struggle with the burden of living expenses.

Cohn argued that the reduction in the Fed's advance guidance could revive necessary discipline in financial markets. Before 2008, the Fed repeatedly changed interest rates in unscheduled meetings, and market participants managed risk under the premise that policy changes could occur at any time. He emphasized that since the market for hedging interest rate risk is sufficiently developed, investors should directly check their exposure rather than expecting protection from the Fed.

[Key Article Summary]

-Gary Cohn assessed that the Fed is moving away from the practice of pre-announcing policy directions and returning to past methods.

-The U.S. Treasury yield curve has steepened by 60 basis points, and bond issuance related to AI and data centers could amount to an additional $1 trillion.

-Cohn emphasized that market participants should focus on their own interest rate risk management rather than relying on Fed protection.

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