Federal Reserve Officials Downplay Risk of US Debt Selloff, but September Policy Disagreements Remain

Comparing news, US bonds have recently been drastically sold off, and long-term yields once rose to the highest level since 2007, yet Federal Reserve officials have downplayed concerns about the so-called damage to the market's policy credibility. San Francisco Federal Reserve Chairman Daly and St. Louis Federal Reserve Chairman Mussalem both believe that the increase in long-term US bond yields is more due to government financing needs and capital requirements brought about by AI infrastructure construction, rather than inflation expectations getting out of control.

However, the two clearly disagree on the September monetary policy. Daly believes that recent inflation, retail sales, and employment data have mitigated the need for further policy tightening. Currently, the policy is in a good state, and there is insufficient pre-emptive basis for interest rate hikes or interest rate cuts. Mussalem, on the other hand, is hawkish, saying that the underlying inflation rate is still at a high level of 2.5% to 3%. The current policy may be close to neutral or even loose, and revealed that it is more inclined to raise interest rates at the July meeting.

At present, the market's expectations for the September rate hike have cooled down drastically, and the relevant probability has dropped from over 70% at the end of July to about 30%. It is worth noting that neither of them has the right to vote in the FOMC this year, and 3 officials already opposed keeping interest rates unchanged at the July meeting, indicating that the internal policy differences of the Federal Reserve have not been resolved.