China International Capital Co said the Fed left rates unchanged at its July
meeting but internal hawks strengthened, with three voting members favoring a
25bp hike. The note highlighted a policy shift: Wosh sought to reduce direct
intervene and rely more on market-driven rate increases, effectively
"outsourcing" part of the tightening process to markets. With inflation still
above target, CICC warned this could erode confidence in Fed credibility. After
the meeting long-end U.S. Treasury yields jumped and the curve steepened,
signaling investors are starting to price higher long-term inflation and policy
risk. CICC said if employment or inflation data surprise to the upside, markets
will likely raise odds of a September hike and may start pricing a risk that the
Fed acts "too late," which would push long rates higher and increase downside
pressure on risk assets.
