"The Anchor of Global Asset Pricing" Continues to Rise: Federal Reserve Officials Call for "Hawkish Rate Cuts"

According to the financial news app Zhitong Finance, Mary Daly, President of the Federal Reserve Bank of San Francisco, stated on Monday that she expects the Federal Reserve to continue cutting interest rates as inflation continues to cool, in order to prevent further weakness in the U.S. labor market. In contrast, other Federal Reserve officials generally expressed in their speeches on Monday that they support slowing down the pace of interest rate cuts by the Federal Reserve, rather than continuing the extraordinary pace of up to 50 basis points seen in September. They also mentioned that it may be necessary to "pause rate cuts" appropriately instead of mechanically announcing rate cuts at every rate meeting.

Since October, several Federal Reserve officials have expressed support for a "gradual rate cut process" rather than the extraordinary pace of 50 basis points, and have advocated making rate cut decisions based on data rather than mechanically announcing rate cuts at every FOMC rate meeting. These officials' latest views have been described as "hawkish rate cuts," meaning maintaining the overall direction of gradual rate cuts, but the specific pace and steps of rate cuts are not fixed. They may even choose to press the "pause button" to observe the trend of economic data on the path of rate cuts. It is worth noting that this week is the last opportunity for Federal Reserve officials to publicly express their views before the blackout period of the November rate decision.

The call for advancing rate cuts while maintaining a hawkish stance has cooled market expectations for the remaining time this year and next year's rate cuts by the Federal Reserve, driving U.S. bond yields, especially long-term yields of 10 years and above, to continue to rise recently. The 10-year U.S. bond yield, known as the "anchor of global asset pricing," has been rising since October and is currently hovering near the high point since July, closing at 4.20% on Monday.

The analysis team from the Wall Street giant JP Morgan Chase stated that as the U.S. bond yield curve continues to steepen, long-term U.S. bond yields may further rise. It is understood that Arif Husain, Chief Investment Officer of the Fixed Income Department at the U.S. asset management company T. Rowe Price, stated: "In the next six months, the 10-year U.S. bond yield will test the key threshold of 5%, and the U.S. bond yield curve will become steeper."

If Arif Husain's prediction proves to be correct, global financial markets will experience a turbulent "repricing wave." This also highlights that after continuously better-than-expected economic data raised doubts about the Federal Reserve's possible slowdown in rate cuts, strategists are increasingly debating the trend of the world's largest bond market. Arif Husain's prediction sharply contrasts with the market's expectation of a decline in U.S. bond yields after the Federal Reserve cut rates last month. Bond traders currently generally expect the 10-year U.S. bond yield to fall to 3.67% by the second quarter of next year.

From a theoretical perspective, the 10-year U.S. bond yield is equivalent to the risk-free rate indicator r at the denominator end of the important valuation model in the stock market - the DCF valuation model With no significant changes in other indicators, especially the expected cash flow on the molecular end, and even in the case where the molecular end of the U.S. stock earnings season that started in October may lean towards lower expectations, the valuation of high-denominator levels or operating at historical highs, U.S. technology stocks, high-risk corporate bonds, cryptocurrencies, and other risky assets face a trend of contraction in valuation.

Traders Begin Pricing in the Fed's "Pause in Rate Cuts"

Data from the swap trading market currently shows that traders are betting on the Fed cutting rates by 21 basis points at the November meeting, with a total rate cut of 39 basis points in the last two meetings of the year. This latest pricing indicates that some traders believe there is a high probability that the Fed will announce a "pause in rate cuts" at one of the meetings. Especially after the strong September non-farm payroll data and better-than-expected retail sales growth in the U.S., the fundamentals of the U.S. economy seem much stronger than what most economists had anticipated, garnering increasing support for the hawkish view of a "pause in rate cuts".

Compared to the more hawkish stance of other Fed officials, Daly's attitude appears relatively moderate. "So far, I haven't seen any information indicating that we won't continue to lower interest rates," Daly said at a meeting on Monday. "For an economy that is close to a 2% inflation rate, this is a very tight rate, and I don't want to see any deterioration in the labor market."

Fed officials initiated a rate cut cycle at the FOMC meeting last month, marking the first rate cut since the outbreak of the COVID-19 pandemic. Due to concerns about deteriorating labor market conditions and inflation being very close to the Fed's target of 2%, the Fed unexpectedly cut the benchmark rate by 50 basis points in September to a range of 4.75% to 5%.

However, economic data since then has shown that non-farm payrolls and business hiring in recent months have been much better than initially reported, with resilient month-on-month growth in retail sales, indicating that consumer spending, crucial for the U.S. economy, remains very healthy. Market participants now widely expect the Fed to announce a 25 basis point rate cut at the November 6-7 meeting, but as indicated by pricing in the swap market, some traders are betting that the Fed will hit the "pause button" on rate cuts next month.

"We will continue to adjust policies to ensure they are in line with our economy and its evolving dynamics," Daly said. However, leaning towards a dovish stance, she did not comment on the pace and speed of future rate cuts by the Fed. She had previously publicly supported the decision to cut rates by 50 basis points in September and also stated that in her view, a 50 basis point rate cut remains one of the options for the upcoming meetings.

Most Fed Officials Lean Hawkish

Earlier on Monday, Fed officials speaking on other occasions generally expressed support for a slower pace of rate cuts than the 50 basis points cut in September, revealing a view in favor of a "pause in rate cuts" under the backdrop of strong economic data.

According to Torsten Slok, Chief Economist at Apollo Global Management, with robust growth in the U.S. economy and a continued hot job market, the likelihood of Fed officials maintaining rates in November is increasing Slok believes that there are many reasons for the strong US economy. The dovish Fed, rising stock and housing prices, narrow credit spreads, and the "broadly open" corporate financing in both public and private markets are just some of the factors. Slok's hawkish views seem to be gaining the trust of Wall Street and Federal Reserve officials.

Compared to Daly's conservative views, most Federal Reserve officials have recently shown a rather hawkish stance on rate cuts. Dallas Fed President Kaplan stated that in a highly uncertain economic environment, officials should proceed cautiously and believe that "gradually lowering policy rates to a more normal or neutral level helps manage risks and achieve our goals."

Minneapolis Fed President Kashkari stated that he "expects more moderate rate cuts over the next few quarters to achieve the Fed's neutral rate target." Kansas City Fed President George also expressed his strong desire to "avoid overly aggressive moves, especially considering the significant uncertainty about the ultimate policy goals," indicating his preference for a cautious and gradual policy approach, as well as assessing the need for further rate cuts based on economic data.

George is a voting member of the FOMC until 2025, so his views are considered crucial for the pace and specific path of Fed rate cuts. George predicts that the future Fed benchmark rate will be significantly higher than the average level of the past decade before the outbreak of the pandemic. This expected increase may be driven by productivity improvements, increased investment, and the accumulation of government debt