Following the FOMC meeting, US stocks and bonds fell across the board. A new "Federal Reserve mouthpiece" reports that energy and AI investments are changing the inflation landscape.

Following the FOMC meeting, US stocks and bonds fell across the board. A new "Federal Reserve mouthpiece" reports that energy and AI investments are changing the inflation landscape.

The Federal Reserve's resumption of interest rate hikes after more than three years did not bring much surprise to the market. However, Chairman Warsh's limited information on the future path of interest rates at the post-meeting press conference exacerbated investors' concerns about higher interest rates and longer-term inflationary pressures, putting pressure on US stocks and bonds.

On Wednesday, the Federal Reserve raised the target range for the federal funds rate by 25 basis points to 3.75% to 4%, marking its first rate hike since 2023. Prior to the meeting, the US stock and bond markets were relatively stable; however, during Warsh's press conference, risk assets and long-term US Treasuries experienced significant selling .

At the close of trading, the Dow Jones Industrial Average fell 631.21 points, or 1.21%, to 51,461.90; the S&P 500 fell 33.92 points, or 0.45%, to 7,551.81; and the Nasdaq Composite Index dipped 0.01% to 25,978.42.

The adjustment in the US Treasury market was more direct. The yield on the two-year Treasury note rose 6.5 basis points to 4.725%, the highest closing level since July 2024; the yield on the 10-year Treasury note rose 0.8 basis points to 5.003%, reaching a 19-year high. The yield on the 30-year Treasury note, however, fell slightly by 1.7 basis points to 5.346%.

Timiraos, the "New Fed Watcher": Energy shocks and AI investments are changing the inflation landscape.

Nick Timiraos, a Wall Street Journal reporter and regarded by the market as an important "mouthpiece" for the Federal Reserve, pointed out that this rate hike reflects a change in the inflationary environment faced by the Fed.

Over the past year, the Federal Reserve has attempted to address the risks of a weakening labor market by cutting interest rates, but the job market has not shown the significant deterioration previously feared; in fact, the unemployment rate has fallen from 4.5% to 4.1%. Meanwhile, inflation has failed to continue moving toward the 2% target.

More importantly, energy prices and AI investments are simultaneously putting new pressure on inflation.

The war in Iran has led to a resurgence in energy prices, with diesel prices seeing a particularly significant increase due to factors such as refining bottlenecks. Former New York Federal Reserve President William Dudley stated that diesel prices are behaving "like crude oil reaching $200 a barrel."

At the same time, the investment in infrastructure such as data centers driven by the AI boom is rapidly increasing economic demand. These investments are not particularly sensitive to interest rate changes because a large amount of capital has already been invested, and the expected returns far outweigh the impact of small interest rate fluctuations on financing costs.

Therefore, raising interest rates cannot directly increase crude oil supply, nor can it directly stop investment in AI infrastructure. However, it can reduce overall demand pressure by suppressing other economic activities that are more sensitive to interest rates.

However, Timiraos also noted that the market does not unanimously believe the Federal Reserve should continue raising interest rates. Goldman Sachs economists believe that core price growth has slowed recently, and some inflation overshooting may be due to one-off factors, thus the economic basis for further rate hikes remains limited.

Long-term US Treasury bonds are already trading in future inflation and the credibility of the Federal Reserve's monetary policy.

Timiraos also pointed out that the recent continuous rise in long-term US Treasury yields cannot be simply attributed to the Federal Reserve's interest rate hikes.

The 10-year US Treasury yield has recently risen above 5%, nearing its highest level in 20 years. Investors attribute this trend to growth expectations driven by AI investment, competition for capital in data center financing, and a reassessment of future inflation and the Federal Reserve's eventual interest rate level.

This means that the US Treasury market is no longer only concerned with this rate hike, but also with how high the Federal Reserve will ultimately need to raise interest rates and how long high interest rates will be maintained.

Timiraos specifically noted that during Warsh's July press conference, long-term US Treasury yields rose significantly and have not fully fallen since. James Egelhof, chief US economist at BNP Paribas, believes this reflects, to some extent, a reassessment of the market's confidence in the Federal Reserve's monetary policy.

At this meeting, 16 of the 18 Federal Reserve officials expected at least one more rate hike this year, with 12 expecting one more hike and 4 expecting two more. However, Warsh did not specify exactly how many more rate hikes would be needed to bring inflation back to 2%.

Therefore, Wednesday's reaction in the stock and bond markets was more like a repricing of the future policy path: short-term US Treasury yields reflected market expectations for further interest rate hikes, while long-term yields reflected more concerns about long-term inflation, economic growth, and policy credibility, while US stocks were suppressed by higher risk-free interest rates on valuations.

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