The Zhitong Finance App learned that San Francisco Federal Reserve Chairman Mary Daly said on Monday that she expects the Federal Reserve to continue to cut interest rates as the inflation rate continues to cool down to prevent further weakening of the US labor market. In contrast, other Federal Reserve officials generally stated in their remarks on Monday that they are in favor of slowing down the pace of the Fed's interest rate cuts rather than continuing the abnormal pace of 50 basis points like in September, and that interest rate cuts should not be mechanically announced at every interest rate meeting; an appropriate “suspension of interest rate cuts” may be necessary.

Since October, many Fed officials have expressed support for a “gradual interest rate cut process” rather than an unconventional rate cut pace of 50 basis points, and advocated making interest rate cut decisions based on data rather than mechanically announcing interest rate cuts at every FOMC interest rate meeting. The latest opinion of these officials has been described as “hawkish interest rate cuts,” that is, maintaining the general direction of gradual interest rate cuts, but the specific pace and pace of interest rate cuts is not fixed, and they may even choose to press the “pause button” to observe economic data trends on the path of interest rate cuts. Notably, this week is the last chance for Federal Reserve officials to publicly express their views before the November interest rate decision's silence period.

This call to push forward interest rate cuts while maintaining a hawkish stance has cooled the market's expectations for the rest of the year and next year, driving US bond yields, especially those on long-term US bonds of 10 years or more, to continue to rise recently. The yield on 10-year US bonds, which have the title of “the anchor of global asset pricing,” has continued to rise since October. Currently, it is hovering near the high since July, and closed at 4.20% on Monday.

An analysis team from Wall Street bank J.P. Morgan Chase said that while the US bond yield curve continues to steep, long-term US bond yields may rise further. It is understood that from the US asset management company T. Arif Husain, chief investment officer of Rowe Price's fixed income division, said, “In the next six months, 10-year US Treasury yields will test the critical threshold of 5%, and the US Treasury yield curve will become steeper.”

If Arif Husain's predictions prove correct, global financial markets will usher in a turbulent “wave of repricing.” This also highlights that after economic data that continued to exceed expectations raised questions about the possibility that the Federal Reserve may slow down the pace of interest rate cuts, strategists are increasingly debating the trend of the world's largest bond market. Arif Husain's prediction is in stark contrast to the market's expectation that US bond yields will fall after the Federal Reserve cut interest rates last month. Bond market traders now generally expect that 10-year US bond yields will fall to 3.67% by the second quarter of next year.

From a theoretical perspective, the 10-year US Treasury yield is equivalent to the risk-free interest rate indicator r on the denominator side of the DCF valuation model, an important valuation model in the stock market. There has been no significant change in other indicators (especially cash flow expectations on the molecular side), and even in the case where the US stock earnings season that began in October may be biased towards a downward trend, the higher the denominator level or continued to operate at historically high levels, and the valuations of risky assets such as US technology stocks, high-risk corporate bonds, and cryptocurrencies, which have historically high valuations, are facing a contraction trend.

Some traders have begun pricing and the Federal Reserve “suspends interest rate cuts”

Current trader betting data in the swap market shows that the Federal Reserve will cut interest rates by 21 basis points at the November meeting, and the rate cut for the last two meetings of this year is 39 basis points. This latest pricing shows that some traders think it is very likely that the Fed will announce a “suspension of interest rate cuts” at one of these meetings. Especially after the US released strong non-farm payrolls data for September and the growth rate of retail sales that exceeded expectations, the fundamentals of the US economy seemed to be much stronger than most economists expected, and the hawkish view of “suspending interest rate cuts” received more and more support.

Compared to the hawkish stance of other Federal Reserve officials, Daly's attitude appears to be relatively moderate. “So far, I haven't seen any information indicating that we won't continue to lower interest rates.” Daly said at a meeting on Monday. “For an economy that is already close to 2% inflation, this is a very tight interest rate, and I don't want to see any deterioration in the labor market.”

Federal Reserve officials began a cycle of interest rate cuts at the FOMC interest rate meeting held last month. This was the first time since the COVID-19 outbreak. The Federal Reserve unexpectedly lowered the benchmark interest rate by 50 basis points to the 4.75% to 5% range in September due to concerns about the deterioration of the labor market and that inflation is indeed very close to the 2% inflation target anchored by the Federal Reserve.

However, economic data since then have shown that non-farm payrolls and corporate recruitment in recent months have been much better than the data initially reported, and retail sales have continued to maintain a resilient pace from month to month, all of which means that consumer spending, which is critical to the US economy, is still very healthy. Market participants now generally expect the Federal Reserve to announce a 25 basis point cut in interest rates at the November 6-7 interest rate meeting, but just like the swap market pricing, some traders are betting that the Fed will press the “pause button” to reduce interest rates next month.

“We will continue to adjust our policies to ensure they are in line with our economy and our growing economy.” Daly said. However, her dovish stance did not choose to comment on the pace and speed of the Fed's future interest rate cuts. Previously, she publicly expressed support for the September decision to cut interest rates by 50 basis points, and also stated that in her opinion, cutting interest rates by 50 basis points is still one of the options for the next meeting.

The position of most Federal Reserve officials is hawkish

Earlier on Monday, Federal Reserve officials speaking on other occasions generally stated that they are in favor of cutting interest rates at a slower rate of 50 basis points than in September, and revealed the view that they support the Federal Reserve's “suspension of interest rate cuts” under strong economic data.

According to information, Torsten Slok, chief managing economist from Apollo Global Management, recently publicly stated that with the strong growth of the US economy and the continuing hot job market, the possibility that Fed officials will keep interest rates unchanged in November is increasing.

Slok believes there are many reasons why the US economy is strong. The dovish Federal Reserve, rising stock and housing prices, narrow credit spreads, and “wide open” corporate financing in the public and private markets are just a few of the factors. Slok's hawkish views seem to be gaining the trust of Wall Street and Federal Reserve officials.

Compared to Daly's conservative views, most Federal Reserve officials have recently been quite hawkish in their views on interest rate cuts. Dallas Federal Reserve Chairman Logan said that in a situation where the economy is highly uncertain, officials should choose to act cautiously, and believes that “gradually reducing policy interest rates to a more normal or neutral level will help manage risks and achieve our goals.”

Minneapolis Federal Reserve Chairman Kashkari said he “expects more moderate interest rate cuts in the next few quarters to achieve the Fed's neutral interest rate target.” Kansas City Federal Reserve Chairman Schmid said that he really wants to “avoid drastic measures, especially considering the huge uncertainty of the ultimate goal of the policy,” and said that he favors a cautious and gradual policy approach, as well as judging whether it is necessary to continue to cut interest rates based on economic data.

Schmidt is a member of the Federal Reserve's FOMC voting committee in 2025, so his views are considered critical to the pace and specific path of the Fed's interest rate cut. Schmid predicts that the future Federal Reserve's benchmark interest rate level will be significantly higher than the average of the decade before the outbreak of the epidemic. This expected increase is likely to be driven by a combination of increased productivity, increased investment, and the accumulation of government debt.