Is the Fed Being Forced to Hike Rates? Juan reveals 'The market has already voted with its feet': A key observation

Recent U.S. economic data and hawkish stances from Federal Reserve (Fed) officials have led markets to widely expect at least one rate hike this year. Financial expert Juan Mu-Hua stated on the program 'Listen to Brother Juan' that the probability of a rate hike at the upcoming Fed meeting has surged to nearly 40%. Soaring oil prices, coupled with rising long-term U.S. Treasury yields, have brought the rate hike option to the forefront. The current federal funds rate set by the Fed is already lagging behind the yield curve, indicating that the market is 'voting with its feet'—a key direction to watch that is pressuring the Fed to raise rates.

What's different about this Fed meeting?

Juan points out that in the past, Fed meetings were relatively predictable due to forward guidance, making pre-meeting speculation rather dull. But this time is different. The market is now seriously discussing a term that has barely been mentioned over the past year—'rate hikes,' not rate cuts. Inflation appears to have peaked, as recent CPI and PPI data have come in stronger than expected. Under these circumstances, why would the Fed consider hiking rates? Most would expect rate cuts, making the prospect of a hike seem abrupt.

Jerome Powell has abandoned forward guidance

Juan notes that Powell, a notably silent Fed chair, has discarded forward guidance. For over a decade, the Fed used forward guidance to align market expectations with its policy direction before rate decisions. But Powell rejects this approach. Since taking office in May, he has stated he personally dislikes forward guidance and believes Fed officials should speak as little as possible. In June, he did not submit personal economic forecasts, and the 'dot plot' provided significantly less information. His public appearances have become rare and extremely brief, with post-meeting press conferences ending after only a few questions. His only repeated message: 'The Fed has more work to do; inflation is still too high.'

Is Powell truly a dovish member, as some claim? At this point, it remains uncertain.

How high is the chance of a rate hike?

Juan suggests we cannot rule out the possibility that Powell might take a hawkish stance and announce a rate hike at this meeting. Market expectations now put the probability of a rate hike at nearly 40%.

Juan explains that in the absence of clear guidance, surging oil prices, and rising long-term Treasury yields, the rate hike option has naturally surfaced. As markets anticipate a Fed hike, oil prices rise, and AI-related financial capital expenditures and financing cycles create uncertainty, financial markets are entering a spiral of decline.

How is Bank of America assessing this Fed meeting?

Juan notes that over the weekend, BofA released a report predicting that rising U.S. Treasury yields are forcing the Fed to hike rates. Previously, the Fed used forward guidance to steer market expectations and interest rates. Now, the dynamic has reversed—markets are pressuring the Fed. With forward guidance gone, markets must still form expectations and trade based on future rate paths. As a result, the bond market has already 'voted with its feet.'

30-year Treasury yield hits highest since financial crisis

Juan highlights the intense selling pressure in the U.S. bond market. The 30-year Treasury yield has reached 3%, the highest since the 2008 financial crisis. The 10-year yield has surged to 4.7%, a recent high. Long-term nominal rates are nearing the 5% threshold. The 2-year yield, closely tied to Fed policy, has also hit 4.3%. At 4.3%, the Fed should technically hike rates by 300 basis points (3 percentage points). The current federal funds rate is clearly lagging behind the yield curve—a key signal that the market is forcing the Fed's hand through its actions.