Fed Hawkish Tone Rises: Cathay United Bank Says Powell Downplays Forward Guidance, USD Remains Strong Short-Term

The U.S. Federal Reserve decided to 'pause rate hikes for the fifth consecutive time,' but saw an unusual internal split with three members voting for a rate hike. Fed Chair Powell continues to downplay forward guidance, urging markets to refocus on economic data such as inflation and employment. Cathay United Bank analyzes that future developments in the Strait of Hormuz and oil prices will be key variables. In the stock market, while tech stocks face short-term pullbacks, corporate fundamentals remain solid, turning market corrections into medium- to long-term buying opportunities. Bond and currency markets are supported by high-rate expectations, with the U.S. dollar maintaining a relatively strong consolidation in the short term.

The Fed held rates steady at its July meeting by a vote of 9 to 3, with three regional Federal Reserve Bank presidents casting dissenting votes in favor of a rate hike. Powell described the divergence as a healthy 'family dispute,' emphasizing that the committee remains united in its goal to combat inflation, though differing in strategy and timing. This highlights a rising hawkish tone within the Fed.

Cathay United Bank notes that the Fed is reducing explicit policy guidance, allowing markets to reflect rate hike expectations independently. During the pause in rate hikes, markets have spontaneously pushed up bond yields, achieving a de facto tightening of financial conditions. Powell continues to downplay forward guidance, entering a phase of 'alert thinking.'

Powell emphasized maintaining the 2% inflation target to restore policy credibility, stating he will not be swayed by a single month of mild data. Future decisions will focus on structural impacts of AI investment and supply chain restructuring (due to geopolitical tensions and tariffs) on prices, avoiding pre-commitments to future policy paths.

Markets are asking whether the Fed still has room to cut rates. Cathay United Bank believes the key lies in the actual reopening of the Strait of Hormuz. If reopening lags, keeping oil prices above $80 for the next two months, the average Q3 oil price will exceed $80—over 20% higher than last year’s (2025) $65, increasing rate hike pressure in September. Faster reopening of the Strait of Hormuz would help ease further rate hike pressure on the Fed.

Regarding stock market outlook, Cathay United Bank notes that ongoing deleveraging pressure in Korean stocks, semiconductor stock deviation adjustments, and unresolved U.S.-Iran tensions slowing oil price declines are causing correction pressure on the Philadelphia Semiconductor Index, Taiwan stocks, and Korean stocks. However, corporate earnings prospects remain strong. Next year’s S&P 500 earnings are expected to maintain double-digit growth, with semiconductor industry earnings growth potentially reaching 40%. Solid fundamentals support the tech sector’s medium- to long-term performance, and recent market pullbacks are gradually revealing buying opportunities.

Although U.S.-Iran tensions have somewhat eased, energy risk premiums have not fully dissipated. Market expectations for the Fed to maintain high rates continue to push U.S. Treasury yields high. In the currency market, limited room for Fed rate cuts supports a relatively strong short-term consolidation of the U.S. dollar.