Huatai Macro says the July FOMC hold has, to some extent, damaged Fed credibility—market inflation expectations rose and long-end yields moved higher. By contrast, June’s unexpectedly hawkish FOMC had tightened financial conditions, lowered inflation expectations and boosted Fed credibility. With energy prices rebounding, July’s pause may have led markets to view Waller’s zero-tolerance inflation rhetoric as bluff; post-meeting inflation expectations and long-term yields rose, signaling a partia

Huatai Macro says the July FOMC hold has, to some extent, damaged Fed credibility—market inflation expectations rose and long-end yields moved higher. By contrast, June’s unexpectedly hawkish FOMC had tightened financial conditions, lowered inflation expectations and boosted Fed credibility. With energy prices rebounding, July’s pause may have led markets to view Waller’s zero-tolerance inflation rhetoric as bluff; post-meeting inflation expectations and long-term yields rose, signaling a partial loss of credibility. Huatai still assigns a relatively high probability of a September rate hike and keeps a baseline of 1–2 hikes this year and two more before mid-next year. Key risks: (1) Waller’s hawkish stance could be bluster; (2) an abrupt end to the AI-driven rally could tighten financial conditions and make further hikes unnecessary. Watch July–August jobs and inflation prints and Waller’s Jackson Hole speech on Aug. 27.