Summary of Key Points
This news article discusses the disagreements within the Federal Reserve regarding interest rate hikes, the relationship between inflation and oil prices, market impacts, and asset allocation: There is a rare level of discord within the Fed about whether to raise interest rates in September (9 members favor maintaining the status quo, while 3 recommend an increase). Although inflation data has cooled down, high oil prices are causing concern. Experts believe that current oil price increases are due to short-term supply disruptions and will not drive long-term inflation. Even if a rate hike occurs by the end of the year, it is likely to be a minor adjustment, with interest rates only expected to fall in 2027. The logic for allocating assets outside of the U.S. remains valid, but timing needs to be carefully considered; gold is under pressure in the short term but holds promise for the long run.
I. Disagreements Within the Federal Reserve: Unprecedented in a Decade
The most recent Federal Reserve interest rate decision (July 29) saw for the first time in a decade three members unanimously opposing the decision to keep rates unchanged, with nine members supporting a 25-basis-point increase. The disagreement did not emerge suddenly; two weeks prior, Dallas Fed Chairman Llogan publicly stated that a moderate hike would better balance employment and price stability—this reflects the Fed's dual mandate. The market also reacted in advance, with the yield on two-year U.S. Treasury bonds rising, indicating that investors are already preparing for a potential rate hike.
In simple terms, some members of the Fed believe it is necessary to take extra precautions since inflation has not yet been fully contained, while others argue that raising rates now could harm the economy.
II. Inflation Cooling Down, but Oil Prices Creating New Concerns: Could Inflation Resurge?
The U.S. CPI (Consumer Price Index) fell by 0.42% month-on-month in June (the largest decline since April 2020), and year-over-year it also dropped to 3.5%, suggesting that inflation is slowing down. However, high oil prices have raised concerns about a potential rebound in inflation.
Expert Levet believes this will not happen. The rise in oil prices is due to supply-side issues (such as disruptions in shipping through the Strait of Hormuz and production cuts by oil-producing countries), rather than excessive demand or rapid wage increases that drive inflation in a vicious cycle. Additionally, gasoline now accounts for a smaller proportion of residents' incomes, so it will not significantly affect consumption. Long-term inflation expectations remain stable, meaning oil prices are unlikely to trigger widespread inflation.
III. Increased Likelihood of Rate Hikes, but Is the Market Prepared?
Levet believes the probability of a rate hike by the end of the year has increased, but if it does happen, it will likely be a one-off move to conclude this interest rate cycle. The market has already factored in this possibility, as the yield on two-year Treasury bonds has risen. Although there were expectations of three rate cuts at the beginning of the year, current forecasts suggest one or two hikes. Credit bonds, value stocks, and small-cap stocks are performing well, indicating that the market views a rate hike as less significant and even as a positive development.
IV. Asset Allocation: Non-U.S. Assets and Gold
1. Non-U.S. Assets: Does the previous recommendation to overweight non-U.S. assets still hold? Levet agrees it does, but two conditions need to be met: global economic recovery and a weakening of the U.S. dollar. The Middle East conflict has slowed this process, but AI companies are performing well, and inflation expectations are stable, so interest rates are not expected to rise significantly. Now is a good time to buy U.S. Treasury bonds. Non-U.S. markets have been driven by AI growth, and traditional sectors (such as manufacturing) will also perform well in the future, eventually leading to a weaker dollar. However, we need to wait out the period of high Fed interest rates.
2. Gold: Gold is closely related to the "real yield" (the difference between bond yields and inflation). Currently, low inflation expectations and rising bond yields result in lower real yields, putting pressure on gold prices since gold does not offer interest. However, if the Fed stops raising rates or even begins cutting them due to a slowdown in the economy, real yields will decrease, which could boost gold prices. Gold is currently stable around $4,000 per ounce, and its price may break new highs by 2027 when the Fed starts cutting rates.
V. What Will Happen to Oil Prices in the Future?
Levet predicts that oil prices will fall below current levels in six months but are unlikely to return to the $55-$60 per barrel range seen at the beginning of the year. High oil prices will slow down the global economy, and markets expect that shipping through the Strait of Hormuz will eventually be resolved through diplomatic negotiations. However, if geopolitical conflicts intensify, this prediction could change. Historical data shows that oil prices usually fall within 12 months after a significant increase, and stock markets tend to rise afterward. The current market trend supports this pattern.
Overall, despite the significant disagreements within the Fed, the market is prepared for potential risks. Long-term inflation and economic trends are relatively controllable, so investors can patiently wait for opportunities in non-U.S. assets and gold for their asset allocation strategies.