Fed's No-Rate-Hike Decision Sparks Major Internal Conflict? Experts Reveal Market 'Policy Game': Dump Assets to Call for Warsh's Rescue

The Federal Open Market Committee (FOMC) of the U.S. Federal Reserve decided at its late July meeting to keep interest rates unchanged, with a vote of 9 in favor and 3 opposed—marking the highest level of disagreement in nearly 10 years. Cleveland Federal Reserve President Beth Hammack, one of the dissenters, advocated for a 0.25% rate hike, stating, "Inflation has remained too high for too long. The longer inflation stays elevated, the greater the challenge and cost of bringing it down."

Financial writer You Tinghao analyzed this situation on the program "Financial World," suggesting that the Federal Reserve and financial markets may be entering a "policy game."

You first questioned whether the Federal Reserve truly has the ability to control inflation. He argued that inflation stems from Middle East tensions, which are putting pressure on the Fed as international oil prices rebound and could become "entrenched." You explained that oil prices have remained high for over six months, leading to spillover effects across other industries.

He cited examples: since the U.S.-Iran conflict escalated, sulfur prices have surged 146%; European natural gas prices have risen 98%; rice prices up 35%; and wheat prices up 15%. This shows that oil price increases have already spread, and even if oil prices fall in the future, inflation expectations will remain elevated. As a result, market sentiment will favor keeping interest rates high. You believes that even if the U.S. and Iran reach a ceasefire, interest rates will remain elevated for some time.

Regarding the possibility of a rate hike in September, You noted that Fed policy is not decided solely by Chair Kevin Warsh but respects internal consensus. Additionally, U.S. government debt has reached 100% of GDP, with hedge funds as major bond buyers engaging in basis trading for arbitrage. Thus, neither hedge funds nor the U.S. government can afford significant interest rate volatility. You pointed out that U.S. market interest rates will remain relatively high but should not continue rising.

You further speculated that the Fed and markets may be entering a "policy game." After the Fed eliminated forward guidance, markets might deliberately "let bond and stock prices fall to show the Fed." If liquidity risks emerge, the Fed will pay attention to the stock market.

You stated, "If the 30-year Treasury yield spikes rapidly, it’s equivalent to the market shouting at Warsh: ‘The bond market is about to collapse—will you come rescue us?’" In the past, the Fed guided the market; now, a clear game of brinkmanship exists between the market and the Fed. Future fluctuations in rate expectations will be key to watch.