The Federal Reserve's “just talk and don't practice” is causing the US bond yield curve to get steeper! “The New King of Debt” Gunlak warns that real action must be taken to fight inflation

The Zhitong Finance App learned that in the early hours of Thursday morning, Beijing time, the Federal Reserve announced that it would keep the federal funds rate target range unchanged between 3.5% and 3.75%, in line with overall market expectations. This is the fifth time in a row that the Federal Reserve “stands still.” Before the Federal Reserve announced this interest rate decision, the market had expected a 30% chance of raising interest rates by 25 basis points.

Although the Federal Reserve did not raise interest rates this time, one of the notable features of this meeting was the sharp increase in the number of negative votes. Three members of the US Federal Open Market Committee (FOMC) opposed keeping interest rates unchanged and advocated raising interest rates by 25 basis points. All negative votes came from regional Federal Reserve presidents, including Dallas Fed President Lori Logan, Minneapolis Federal Reserve President Neil Kashkari, and Cleveland Fed President Beth Hammark. However, in light of the public statements made by the three in the past, this result was not surprising.

Federal Reserve Chairman Walsh reiterated the Fed's determination to control inflation at the press conference, while reminding the market and the public that the road to curbing inflation is difficult and cannot be achieved overnight. He said, “We don't have a one-size-fits-all solution. The problem of inflation cannot be solved in just a few days or weeks.”

When some reporters thought at the press conference that this resolution was a “suspension of interest rate hikes,” Walsh did not agree. He said, “I wouldn't call this operation suspended. I define it as an in-depth assessment of the current state of the economy. It is a careful examination of a series of major problems, and it is also a core topic that clarifies what we need to solve for some time to come.” He added that the Federal Reserve's choice not to adjust interest rates at this time is only the beginning of the policy process, not the end point. Some analysts pointed out that Walsh's statement almost actively prevented the market from interpreting “no interest rate hike” as “policy peaking.”

Despite Walsh's hawkish remarks, the market didn't buy it. The US Treasury yield curve soared sharply over the long term. Among them, the 30-year US Treasury yield surpassed 5.2%, a record high since 2007. Meanwhile, 2-year US Treasury yields, which are highly sensitive to monetary policy, declined. Generally speaking, long-term treasury bond yields reflect market expectations for inflation and fiscal deficits, while short-term treasury bond yields are closely related to recent interest rate trends. The trend at both ends of the US bond yield curve shows that investors believe that the Fed's short-term policy interest rate will remain stable, and this move may further boost inflation in the future.

In response, Jeffrey Gunlak, CEO of Dual Tier Capital and the “King of New Debt,” said bluntly that the US bond market is sending a signal to the Federal Reserve — if policymakers really want to achieve the 2% inflation target, it is not enough to just make tough statements; the Fed must take more practical action.

In an interview on Wednesday after the announcement of the Federal Reserve's latest interest rate decision, Gunlak said, “If you really want to reach the 2% target, I think you have to raise interest rates. I think it will take a long time to achieve 2% inflation. We probably won't be able to reach this goal in the next few years.”

Gunlak said that after the interest rate decision was announced, there were differences in the US Treasury yield curve for different periods, reflecting that investors did not believe that the Federal Reserve would eventually implement its policy position. He said, “The decline in US Treasury yields for the current two-year period is because the market believes that the Federal Reserve is slowly taking action. And after the press conference, long-term treasury yields rose sharply because the 'guardians' of the bond market are sending this message — 'If you really want us to believe your words, then you have to start acting. '”

In addition to Gunlak, Highline Asset Management's fixed income managing director and FedWatch Advisors founder Ben Emmons also said that the steeper yield curve on US bonds indicates that Walsh's “policy strategy lacks credibility.” Emmons pointed out, “It is a convenient way for the market to make its own judgments and tighten the monetary policy environment on its own,” said Emmons. But once inflation accelerates, the market assumes that the Federal Reserve is falling behind the curve again, and this approach may backfire.”

Although Walsh has emphasized on several occasions that the Federal Reserve will return inflation to the target level of 2% at any cost, the central bank is still maintaining a wait-and-see attitude. During the press conference, when repeatedly asked why the Consumer Price Index (CPI) is still holding on while rising by 3.5% year-on-year, Walsh pointed out that the jump in interest rates in the long-term market has objectively taken on part of the Federal Reserve's policy tightening work.

Jack McIntyre, portfolio manager at Brandywine Global Investment Management, stated, “I don't remember seeing reporters on the spot where they were confused and asked for more clarification. The market feels the same way.” He believes that the sharp rise in long-term yields reflects a lack of confidence in the market, and “investors don't believe in his anti-inflation narrative.”