The countdown to the Federal Reserve's interest rate meeting in September has entered its final countdown. After August's CPI data exceeded expectations, the market's pricing for this interest rate hike quickly climbed to more than 85%. However, US President Trump once again publicly put pressure on maintaining low interest rates. The mainstream market discussion still revolves around the binary judgment of “raising interest rates or not”, but failed to realize that the new Chairman Warsh is standing at the triple crossroads of inflation credibility, political constraints and bond market pressure. In the view of the Wmax macro research team, the core of this meeting is far from a single 25 basis point interest rate adjustment, but the most severe test of credibility since Warsh took office. His decision will simultaneously reshape the center of U.S. bond interest rates, the trend of the U.S. dollar, and the market’s long-term pricing of the Fed’s independence.

Inflation breaks down: Better-than-expected data boosts interest rate hike expectations, internal hawkish restraint strengthens

August CPI data released by the U.S. Department of Labor last Friday showed that both overall price growth and core inflation growth exceeded market expectations, completely breaking the previous market narrative of "inflation falling steadily." Driven by the rising energy prices driven by the conflict in the Middle East and the resilient housing sub-sector, the downward slope of inflation has slowed down again, which has also directly pushed up the market pricing of policy tightening. So far, interest rate futures are pointing to an 86% chance of a 25 basis point hike in September, with markets even starting to price in two more hikes before the end of the year.

Wmax believes that the market usually regards interest rate hikes as a passive response to inflation data, but in fact, for Wash, the cost of policy credibility is far greater than the impact of the data itself. At the July interest rate meeting, Warsh's unclear policy communication and failure to clearly respond to inflation risks triggered a sharp rise in the 30-year U.S. Treasury yield. At the July meeting itself, three voting members publicly opposed keeping interest rates unchanged, and internal hawkish differences have become apparent. If he still chooses to stay put this time despite the fact that inflation clearly exceeds expectations, it will not only further intensify the division of internal consensus, but also cause the market to systematically question the credibility of his previous hawkish statements, forming a consistent expectation of "hard words but soft hands". For Warsh, who is trying to reshape the Fed's policy discipline, the cost is much higher than the economic impact of a single interest rate hike.

Political dilemma: White House pressure and mid-term elections constitute implicit constraints on decision-making

Just as inflation data boosted expectations for interest rate hikes, Trump once again publicly intervened in monetary policy discussions, emphasizing that the United States should have “the lowest interest rates in the world,” and even used the trade deficit as a bargaining chip to release policy threats. With less than two months left before the November midterm elections, the pressure on the cost of living caused by high inflation has become the core concern of voters and has a direct impact on the Republican election. For the White House, even if interest rate adjustments take months to be transmitted to the real economy, the policy signal itself can release expectations of economic relief to voters.

Wmax observed that the White House’s attitude towards the Fed shows a clear duality: on the one hand, it emphasizes respecting Warsh’s decision-making independence, and on the other hand, it also clearly conveys the preference that “raising interest rates will not make people happy.” Different from the long-term public confrontation model between former Chairman Powell and the White House, Warsh maintains more frequent informal communication with Trump, which can buffer conflicts caused by policy differences to a certain extent, but does not change the political constraints of the decision-making itself.

As the market generally observes a "no-win situation", Wmax further pointed out that the essence of this dilemma is not a simple dilemma, but a trade-off between short-term political costs and long-term institutional credibility. Since taking office, Warsh has always emphasized the policy independence of the Federal Reserve and is unwilling to go down in history as "succumbing to government pressure." This determines that he will not directly comply with the White House's appeal for an interest rate cut; however, the political impact of the election cycle will make him more restrained in expressing subsequent interest rate hikes to avoid excessively intensifying conflicts with the White House.

Bond market jeopardy: Yields approach the 5% mark, fiscal and inflation are dually priced

What deserves more vigilance than expectations of interest rate hikes is the critical threshold that the U.S. bond market is approaching. Driven by expectations of rebounding inflation and interest rate hikes, the 10-year U.S. Treasury yield rose to 4.97% on Friday, just one step away from the 5% round mark, hitting its highest level since October 2023. In Wmax’s view, the market generally regards 5% as a psychological threshold, but ignores the structural pricing logic behind it – this round of rising long-term yields is the result of the combined effect of inflationary resilience and fiscal expansion pressure, rather than pure monetary policy expectations.

On the one hand, pressure on fiscal fundamentals continues to accumulate. In the first 11 months of this fiscal year, the U.S. federal deficit has reached US$2 trillion, total government debt has exceeded US$40 trillion, and the ratio of debt held by the public to GDP has reached 100%. The idea of "relying on growth to resolve debt" proposed by Finance Minister Bessent hopes that AI investment, manufacturing reshoring and tax cuts will drive the economy to achieve 3% growth. However, the reality is very obvious: the annual growth rate of the U.S. economy has only been about 1.9% since Trump's second term, and there have only been five full years of growth of more than 3% in the past 20 years; in the longer term, the average annual growth rate of the working-age population is 0.3%, which is much lower than the 1990s of the last century. level in 1990s, constituting a hard constraint on growth. Relevant academic research also points out that rigid expenditures such as social security and medical insurance are the core driver of deficit expansion. It is difficult to fundamentally improve the fiscal situation by relying solely on growth without reforming the welfare system.

On the other hand, bond market pressure will in turn restrict the Fed's policy space. Wmax judges that if the Federal Reserve chooses to raise interest rates and releases continued tightening signals, it may further push up long-term yields, which will not only push up mortgage and corporate financing costs, but also increase the federal government's interest expense burden, forming a negative feedback loop of "raising interest rates → pressure on the bond market → increased fiscal pressure → rebound in inflation." This is also an implicit constraint that must be considered in Wash's decision-making, and this level of logic is not covered by most market analysis that focuses on short-term data.

Benchmark judgment and inspiration from major asset classes

Combining the multiple dimensions of inflation data, internal consensus, political constraints and bond market pressure, Wmax judged that a 25 basis point interest rate hike at this meeting is still the baseline scenario, and the probability of occurrence is about 80%. However, Warsh will most likely adopt a balanced strategy of "acting hawks and guiding doves": raising interest rates to fulfill anti-inflation commitments, appease internal hawks, and maintain market credibility; at the same time, he weakened expectations for subsequent interest rate increases at the press conference, emphasizing that the policy will remain patient and rely on follow-up data, thereby easing the political pressure on the White House and preventing further uncontrolled rises in long-term U.S. bond yields.

Regarding major asset classes, Wmax made three clear judgments: First, the short-term interest rates in the U.S. bond market are supported by interest rate hikes, while the long-term interest rates are pulled by dovish expectations and fiscal pressures. The 10-year 5% mark will continue to play games repeatedly. It is difficult to form a trend breakthrough in the short term, but the center of high interest rate fluctuations has systematically moved upward. Second, the U.S. dollar index is likely to show a "buy expectations, sell facts" trend. It remained strong before the interest rate hike was implemented. After the implementation, it was reversely suppressed by dovish guidance and the appreciation of the yen, and faced correction pressure in the short term. Third, the equity market is still volatile before the interest rate hike is implemented, and the technology sector is under the dual pressure of rising long-term interest rates and the unwinding of Japanese yen arbitrage; however, if the meeting is accompanied by clear dovish forward guidance, it is expected to usher in a recovery market after the implementation of the negative interest rate hike.

Overall, the current market is still generally stuck in the linear analysis framework of "inflation data → interest rate hike decision", underestimating the constraints of political games and underlying pressure on the bond market on policy, and ignoring the strategic space of Wash to balance multiple objectives. Wmax always insists on dismantling the Fed's decision-making from a multi-dimensional framework of policy credibility, political cycle and fiscal fundamentals, rather than a simple correspondence of a single data. In the future, we will continue to track meeting resolutions, press conference wordings and bond market capital flows, penetrate surface policies to grasp the underlying logic, and provide a more forward-looking basis for research and judgment for the allocation of large categories of assets.