After the Federal Reserve was put on hold, the market lowered its expectations for a rate hike in September, and the yield on 30-year US Treasury bonds hit a new high in 2007

The Zhitong Finance App learned that after the Federal Reserve kept interest rates unchanged for the fifth time in a row on Wednesday, the market lowered its expectations for the September rate hike. However, under the influence of long-term inflation concerns and fiscal supply pressure, US long-term treasury bonds continued to be sold off, and the yield on 30-year US bonds rose to the highest level since 2007.

The interest rate swap market shows that the probability that the Fed will raise interest rates by 25 basis points in September fell to about 60% after the announcement of the interest rate decision, which is lower than the level of about 70% before the announcement of the resolution, yet the market has fully measured the expectations of the December rate hike. Although three Federal Open Market Committee (FOMC) officials voted for interest rate hikes at this meeting, reflecting growing concerns among some policymakers about rising inflation, the committee under the leadership of Federal Reserve Chairman Walsh ultimately decided to keep the federal funds rate target range unchanged at 3.5% to 3.75%.

In the bond market, there is a clear divergence between long-term and short-term treasury bond trends. The yield on 30-year US Treasury bonds rose more than 10 basis points to the highest level in nearly 19 years; the yield on the two-year US Treasury, which is most sensitive to monetary policy, fell 6 basis points to 4.23%; and the 10-year US Treasury yield rose 5 basis points to 4.66%. The US dollar index weakened at the same time.

This is the second policy statement issued by Walsh since becoming chairman of the Federal Reserve. As before, the statement revealed little about the future policy path, and only reaffirmed the Federal Reserve's firm commitment to price stability. The Federal Open Market Committee (FOMC) ultimately kept interest rates unchanged with 9 votes in favor and 3 against. Dallas Federal Reserve Chairman Logan, Cleveland Federal Reserve Chairman Hamak, and Minneapolis Federal Reserve Chairman Kashkari all voted to raise interest rates by 25 basis points.

Jack McIntyre, portfolio manager at Brandywine Global Investment Management, said that the market's initial reaction was mainly a “sigh of relief” that the Federal Reserve did not immediately raise interest rates this time. However, he believes that the three officials voted for the interest rate hike reflects the FOMC's overall stance being hawkish. If the inflation and employment data released during the September meeting do not cool down significantly in the future, then there is still a high possibility that interest rates will be raised in September.

The interest rate decision also provides more certainty for a market where opinions were previously very divided. Before the resolution was announced, traders once expected the probability of interest rate hikes at this meeting to be about 40%. However, since taking office, Walsh has been pushing the Federal Reserve to reduce forward-looking guidance on future interest rate paths, making market participants have to rely more on economic data rather than verbal guidance from Fed officials to judge policy trends.

“Market participants are learning to pay attention to the 'game itself' rather than the 'referees',” Walsh said at a press conference. He pointed out that as the Federal Reserve reduces expected management of the market, market prices will be adjusted based on its own judgment on economic fundamentals. “I think this is a positive change, and this is just the beginning.”

Analysts believe that although the Federal Reserve chose to stay on hold for the time being, voices within decision makers supporting further policy tightening are increasing. Against the backdrop that inflation is still above target levels and the market has agreed expectations for interest rate hikes at the end of the year, the inflation and employment data released in the next few months will still be a key factor in deciding whether to take action at the September meeting.