Hasty Rate Cut Under Scrutiny: Fed Battles Treasury Sell-Off

Did the rapid interest rate cuts invite criticism?

Recently, many have turned their attention to the U.S. and A-shares, unaware that an epic reckoning seems to be unfolding within the United States.

The U.S. Treasury bonds, which are vital for survival, are collapsing, the dollar is strengthening, yet U.S. bonds are faltering, casting doubt even upon the Federal Reserve.

With strong economic data and renewed concerns about inflation, the current economic landscape in the U.S. is precarious.

Why has the U.S. Treasury bond market suffered such a substantial sell-off? Why is the Federal Reserve still reducing its balance sheet as it enters a period of interest rate cuts? Is the dollar truly as stable as Yellen claims?

Is the rate cut too hasty?

In America, it's often impossible to discern which side is correct; the only constant is that interests are the ultimate truth.

In September, the Federal Reserve announced a 50 basis point rate cut, with the market predicting this was due to signs of recession in the U.S. economy. Despite inflation not reaching targeted levels at that time, the swift reduction by 50 basis points suggested that the U.S. economy might indeed be heading towards recession.

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At that moment, no one criticized the Federal Reserve's action; it seemed to fall within the expected range of responses.

However, on October 4th, the non-farm payroll data for September revealed that the U.S. economy, which had been presumed to be in recession just a month earlier, was now surprisingly robust.

Consequently, concerns regarding U.S. inflation escalated, making the Federal Reserve's September rate cut of 50 basis points a prime target for scrutiny.

On October 25th, former U.S. Board member Kevin Warsh publicly criticized the Federal Reserve in an interview, declaring that the previously announced policies were at odds with the September rate cut.

While the Federal Reserve professes to prioritize inflation, it seems to have overlooked the rising inflation while cutting rates, raising questions about whether its actions are politically motivated.

A series of hawkish statements resulted in the dollar experiencing a rapid awakening, jumping 4.3 points from 100, an astonishing speed occurring within a rate cut cycle.

Before the rate cuts had even begun, the U.S. was aggressively extracting liquidity from around the globe, placing immense pressure on the international financial markets.

Yet now, the Federal Reserve should ideally opt for continued rate cuts to address this situation. However, the relentless hawkish rhetoric and chaotic expectation management have left the market increasingly unsettled.

At this point, investors find themselves confused—should they trust the various economic data released by the U.S., or heed the remarks of high-ranking Federal Reserve officials?

Ultimately, the market has descended into chaos and unease, with no one able to predict exactly what the future holds.

A fierce wave of sell-offs

While the market is shrouded in confusion, Wall Street capitalists have already begun to take action.

Since U.S. economic data shows resilience, and inflation concerns have intensified, does this mean the U.S. might not need to lower rates any further?

In the Treasury market, the volume of bond sales has reached unprecedented levels, even setting the highest record in nearly half a year, while interest rates have soared, nearly returning to the levels seen in July, briefly hitting peaks of 4.2%.

You may be unaware that the 10-year U.S. Treasury bond is regarded globally as a benchmark, so a sudden spike in rates indicates widespread panic selling of U.S. bonds, undoubtedly complicating the nation's ability to borrow.

This massive sell-off has not only depressed the U.S. bond market but has also placed significant pressure on the global market.

In just a month, the dollar's price surged by over 3%, surpassing 150 against the yen, prompting officials in Japan to issue warnings to take heed of the yen's steep decline.

The Mexican peso has similarly faced immense sell-off pressures.

Following the release of impressive employment data, the market's speculation about the necessity of drastically lowering interest rates was abruptly shattered, which heavily impacted investor sentiment.

This will inevitably affect exporting countries, and domestically, the direct consequence of tariffs is that U.S. citizens need to spend more money on the same goods, indicating that inflation in the U.S. will soon rekindle.

All signs indicate that whether the U.S. will cut rates this year remains a significant challenge.

The dollar's dominance is at a crossroads

A crucial point to note is that while the Fed initiated a rate cut in September, it simultaneously began to reduce its balance sheet.

What does reducing the balance sheet mean?

The balance sheet represents assets and liabilities. To put it simply, when the U.S. government runs out of money, the Treasury issues bonds to borrow from the market, with the Federal Reserve being the largest holder of these bonds.

This means the Federal Reserve prints money to buy these bonds, leading to what is known as "expanding the balance sheet," which injects liquidity into the market.

Reducing the balance sheet means the Federal Reserve is selling bonds, which withdraws liquidity from the market.

On one hand, there's a rate cut, on the other, a reduction of the balance sheet; this seemingly contradictory behavior reveals the complexity of the U.S. economy.

Rate cuts are necessary due to an economic downturn, while balance sheet reduction is essential to control inflation.

However, the U.S. now faces a dilemma; if it cuts rates, inflation risks reigniting, leading to accelerated capital outflows. If rates are raised, how will the high national debt be managed?

On one hand is the dollar's supremacy, on the other, the Treasuries that underpin American stability. Which path will the U.S. choose?

For contemporary America, the options available are indeed quite limited.

The debt issue looms like a heavy black swan on the back of the U.S. economy, while the troubling inflation is equally suffocating.

Worse still, the current fiscal status of the U.S. shows no signs of improvement, rather a downward trend. This not only suggests that this black swan will soar faster in the future but may also hint that even if the dollar's position can be maintained today, how long can it sustain this position if it continues to sacrifice national interests?

Perhaps only time will answer this question.