Rate Hike in September? Experts Reveal 'What the Fed Is Quietly Buying': US Treasury Yields Determine Rate Hike Necessity

On August 20, the U.S. Federal Reserve (Fed) released the minutes from the July meeting of the Federal Open Market Committee (FOMC), revealing that many policymakers believe rate hikes may be necessary if inflation fails to decline—indicating a growing hawkish sentiment.

Hsu Wei-yao, Product Manager at Allianz Investments, appeared on the program 'Financial Wake-Up Call' and analyzed that the probability of a Fed rate hike remains low.

### Hsu Wei-yao: The Fed's Treasury Holdings Are Quietly Increasing

Hsu Wei-yao points out that the Fed's ratio of Treasury holdings has recently been quietly rising—from approximately $4 trillion (about NT$127 trillion) to around $4.5 trillion (about NT$143 trillion). Notably, the Fed's holdings of long-term Treasuries have continuously increased and never decreased.

Hsu explains that quantitative easing (QE) can be simply defined as 'the Fed printing money and purchasing bonds from the market.' Therefore, the Fed's bond holdings serve as a measure of 'how much money the Fed has printed.' Although the Fed began balance sheet reduction (QT) in 2022, its holdings of long-term debt have remained unchanged—or even increased—suggesting that the Fed has only reduced short-term debt.

Hsu predicts that based on the Fed's recent actions, he is not concerned about imminent rate hikes. The August 20 meeting minutes indicated that the Fed is worried about structural inflation increases and the potential for artificial intelligence (AI) development to drive inflation higher. Thus, if financing costs for tech giants rise, slowing AI development, inflation could be moderated. Hsu notes that if the Fed observes rising U.S. Treasury yields, the necessity for rate hikes would decrease.

### Will the Fed Return to a Rate-Cutting Cycle by 2027?

Hsu emphasizes that even if the Fed does raise rates, it won't alter the trend of inflation remaining sticky yet gradually cooling. While the Fed may not immediately cut rates, Hsu forecasts with confidence that it will inevitably return to a rate-cutting cycle by 2027–2028.