Looking at the latest data, inflation in the United States has made a "comeback," not only has the expectation of interest rate cuts diminished rapidly, but U.S. Treasury yields have also surged. The Federal Reserve has cut interest rates, but it seems as if they haven't.

The Federal Reserve has cut interest rates, yet it appears as though they haven't.

Some economists even boldly predict that the Federal Reserve may only cut interest rates once this year. If inflation still can't be suppressed, then the Federal Reserve will halt interest rate cuts next year.

So today, let's discuss the latest situation of U.S. monetary policy once again.

U.S. Treasury bonds surge! Inflation expectations cool down rapidly?

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Whether the U.S. will not cut interest rates in November depends on two factors: one is the actual state of the U.S. economy, whether the degree of recession is acceptable to the Federal Reserve, and the second is whether U.S. inflation data exceeds expectations. If it does, then the magnitude of the interest rate cut will be reduced.

On this basis, let's directly look at two sets of data. One is the U.S. CPI index for September, especially the core CPI index, which greatly exceeded expectations. This means that there is still a risk of U.S. inflation making a comeback; fortunately, the PPI for September was flat, and gasoline prices fell, leading to a temporary easing of U.S. inflation.

September CPI greatly exceeded market expectations.

On this basis, the Federal Reserve's original plan to cut interest rates by 50 basis points in November was disrupted, and currently, there is a 95% probability of a 25 basis point cut. Compared to the previous expectation of a 50 basis point reduction, it has actually been shortened.

A reduction in the magnitude of the interest rate cut will have an impact and shock on the capital market. For example, the 10-year U.S. Treasury yield, known as the "global asset pricing anchor," has risen from 3.6% in mid-September to the current 4.1%. This yield is now similar to the yield for most of last year.Compared to the grandiose rhetoric of Federal Reserve officials, the yield on Treasury bonds does not deceive, which means that the current cost of funds within the United States is now roughly the same as before the rate cut last year.

10-year U.S. Treasury yield

Although the Federal Reserve has cut interest rates, the situation with Treasury bonds seems to indicate that there has been no rate cut.

What actually hinders the Federal Reserve from cutting interest rates is also the economic data within the United States. Why did the Federal Reserve cut interest rates in September? It was because the U.S. economic data was very disappointing before that, with factories closing down, large companies laying off employees, ugly employment data, and the unemployment rate soaring to 4.3%.

The Federal Reserve felt that if they did not cut interest rates, the U.S. economy would be doomed, so they cut interest rates by a large margin of 50 basis points in September.

Unexpectedly, as of now, the U.S. economy seems to be telling the Federal Reserve with different data that their rate cut was a mistake. The U.S. non-farm data for September has been released, with 254,000 new jobs added that month and the unemployment rate dropping to 4.1%. It even revised the previous employment data.

Looking at the latest data, the U.S. economy is not bad, right?

Therefore, some experts have said that they believe the revision of employment data means that the recession issue that the Federal Reserve is worried about has been temporarily alleviated. The U.S. economy may not only experience the so-called "soft landing" but also has the possibility of not landing at all.

This means that the Federal Reserve does not need to be "caught in a dilemma." Instead, they can continue to maintain high interest rates to suppress the "damn inflation" that the United States fears the most.

While cutting interest rates and shrinking the balance sheet, the Federal Reserve has accomplished a historic feat.In fact, the Federal Reserve knows that it is caught in a dilemma. We can discern this from Powell's actual actions.

Although the Federal Reserve has already cut interest rates in September, it has not abandoned its previous plan to shrink its balance sheet. The Federal Reserve's balance sheet continued to decrease by $66 billion in September, with a total asset and liability of $7.05 trillion, which has reached the lowest point in four years.

The Federal Reserve's balance sheet is continuously "shrinking."

Compared to the first time it locked its balance sheet two years ago, the Federal Reserve has shrunk its balance sheet by $1.92 trillion. It has withdrawn a large amount of liquidity from the market.

So now the Federal Reserve is cutting interest rates on one hand and shrinking its balance sheet and withdrawing liquidity on the other, which is equivalent to a swimming pool both draining water and continuing to add water at the same time. What will happen to this swimming pool? Naturally, the water will not decrease.

Historically, the United States has not experienced a similar phenomenon before. After all, it was either cutting interest rates or raising them before. If the Federal Reserve cuts interest rates, the balance sheet reduction should also stop.

Behind this contradictory policy, it actually highlights the Federal Reserve's own contradictory attitude: inflation has not completely ended on one side, but the U.S. election is about to start, and Harris is going to run for president. To please the Democratic Party, it is possible to consider cutting interest rates by 50 basis points to stimulate it. Let American voters vote for Harris.

The Federal Reserve may cut interest rates to please the Democratic Party.

As for economic data, it can be revised anyway, and it will be fine after the revision. The inflation that has been emphasized before has been selectively "ignored" by the Federal Reserve in the past month.

But no matter what, at present, the U.S. economic data is still good, and it can even be said to be relatively strong. In this case, the United States should be worried about inflation, not the problem of economic recession.So, the balance sheet reduction cannot be stopped. As expected, the reduction of $66 billion per month will continue until next year. Since the balance sheet lock cannot be stopped, what can be stopped is the interest rate cut. Therefore, according to the current situation, the market predicts a 25 basis point rate cut in November.

The probability of a 25 basis point rate cut in December is currently 78.5%, but the specific situation still depends on the release of economic data for October and November.

However, regardless of the circumstances, the Fed's approach of easing and tightening monetary policy at the same time has also created a new historical precedent.