Summary of Key Points
At this week's Federal Reserve interest rate meeting, 9 votes favored keeping the rates unchanged, while 3 voted against it, marking the highest number of dissenting votes in a decade. The three officials who opposed the decision believed that immediate and gradual rate hikes were necessary to prevent high inflation from becoming entrenched (forming a vicious cycle). However, the majority, led by Chairman Jerome Powell, preferred to wait for more data to confirm that inflation was declining. The market has developed a "credibility gap" with Powell due to his statements about controlling inflation without concrete action, which has led to long-term U.S. Treasury yields soaring to their highest levels in over a decade. Powell faces dual pressures: from the White House (which is advocating for loose monetary policy under President Donald Trump) and from hawkish members within the Fed. There is significant disagreement about the future direction of policy; some institutions predict rate hikes, others expect cuts, and still others suggest maintaining the status quo.
1. Disagreement Within the Federal Reserve: Three Votes Against Keeping Rates Unchanged, Fearing Inflation Will Persist
The number of dissenting votes was the highest in a decade. The main concern of the three opponents was that if rates were not raised now, high inflation could become entrenched. In simple terms, if inflation remains high for a long time, businesses would get used to raising prices, and workers would demand higher wages, creating a cycle of "price increases → wage increases → more price increases," making it difficult to curb later on.
- Minneapolis Fed Chairman Neel Kashkari said, "It's better to raise rates slightly now than to have to raise them sharply later; a sharp hike could potentially crush the economy. If inflation does indeed decline, we can always stop raising rates."
- Cleveland Fed Chairman Loretta Harmer was even more direct: "Inflation has been above the target for over five years; I don't believe it will go down on its own. Businesses and consumers in our region are expressing growing concerns about price pressures."
- Dallas Fed Chairman Robert Kaplan added, "Current policies have no effect on inflation at all. If we don't raise rates, unless there is a sudden shock (such as a sharp drop in oil prices), inflation will likely remain high. We can't rely on accidents; it's safer to take proactive action."
They also cited the severe inflation of the 1970s as an example: policymakers initially attributed the inflation to "external factors" (like the oil crisis) and did not raise rates in time, resulting in a long-term problem that took a great deal to resolve.
2. The Market No Longer Trusts the Federal Reserve: U.S. Treasury Yields Soar to Record Levels
Powell repeatedly claims that he can bring inflation down to the 2% target, but since no rate hike was announced at this meeting, the market believes he is "saying one thing but doing another." This has created a credibility gap. How is this reflected? Long-term U.S. Treasury yields have skyrocketed: the 10-year yield broke above 4.7% (the highest since 2025), and the 30-year yield exceeded 5.25% (the highest since 2007). Why are yields rising? Investors buying Treasuries believe that if the Fed cannot control inflation, the value of their money will decline in the future, so they demand higher interest rates as a form of compensation for the risk.
Citibank's chief economist stated, "This is the market casting its vote of distrust—questioning whether the Fed has the willingness and ability to curb inflation. Powell only says he is a hawk, but what the market wants are concrete actions."
3. Powell's Dilemma: Balancing the White House and Hawkish Members Within the Fed
Powell is in a difficult position:
- On one side, there is President Trump, who advocates for loose monetary policy (possibly to boost the economy before elections). If Powell raises rates, the White House will be dissatisfied.
- On the other side, more and more Fed officials are calling for rate hikes. If inflation has not declined by the next meeting, they may unite against keeping rates unchanged.
An expert with 18 years of experience at the Fed analyzed, "Powell needs to balance two roles: he must be the hawkish chairman committed to controlling inflation while also maintaining a good relationship with the White House. By the September meeting, he must make a clear choice; he can no longer wait."
Council members have already signaled that if inflation does not significantly decline this summer, they will push for a rate hike in September. If Powell still wants to keep rates unchanged, he may not even gain the majority of votes.
4. Divided Predictions from Institutions: Some Call for Hikes, Others for Cuts—Whose Should We Listen To?
The market's views on future policy are completely divided:
- Hike Camp: Bank of America predicts three rate hikes starting in September due to stubborn inflation.
- Status Quo Camp: Goldman Sachs and Barclays believe that inflation is caused by supply-side shocks (such as the U.S.-Iran conflict driving up oil prices, Trump's tariffs), which are temporary and will lead to a natural decline in inflation, so no need for rate hikes.
- Cut Camp: Citibank (formerly considered dovish) now predicts rate cuts in October and December this year, and even further cuts in 2027, suggesting that the economy may weaken and require loose monetary policy.
The key issue is whether inflation is a temporary supply problem or a long-term demand problem. If it's a supply issue (like high oil prices), raising rates will be ineffective (the Fed cannot control international oil prices). If it's a demand problem (such as excessive spending), then raising rates would help curb inflation. Some also worry that rate hikes could harm the labor market (e.g., by causing companies to lay off workers) and the housing market (higher mortgage rates making it harder for people to buy homes).
In summary, the Fed is internally divided, the market lacks trust, and there are external pressures. The policy direction over the next few months will have a direct impact on the U.S. economy and global markets. Everyone is closely watching the results of the September meeting.