Possible End to Rate Cuts; $36T May Withdraw

At present, the U.S. financial market is on the eve of a storm, amidst record uncertainty. The latest U.S. inflation data for September showed an increase across the board that exceeded expectations, with core CPI recording the strongest rise since March. Additionally, initial jobless claims have soared to their highest level in a year. If the Federal Reserve does not cut interest rates in November, traders will face unprecedented losses. At this critical juncture of shifting expectations for a rate cut, the Federal Reserve has sent out the latest signal of a harvest cycle, responding to market pressure and the fervent expectation for a rate cut, by once again dropping a "deep-water bomb" into the market.

We have observed that on the evening of October 10th, after the September CPI data was released, although several policymakers, including Chicago Fed President Goolsbee and New York Fed President Williams, hinted at continued rate cuts, comments made by Federal Reserve Governor Bostic (with voting rights in 2024) to The Wall Street Journal subsequently overturned the proposal to continue rate cuts.

This seems more like a deliberate arrangement by Federal Reserve Chairman Powell to have this "Great Hawk King" Atlanta Fed President Bostic appear in media interviews to convey a hardline stance of "supporting a pause in rate cuts." Moreover, this "Hawk King's" speaking schedule did not appear on the financial calendar, seemingly an emergency action taken by the Federal Reserve in response to market pressure for rate cuts, preemptively declaring that the expectation for a rate cut in November might change, igniting discussions on whether the Federal Reserve will opt for a small rate cut or pause after the significant cut in September.

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Bostic stated that he is "completely comfortable" with skipping a rate cut at the upcoming Federal Reserve meeting, and that the warming September inflation and employment data may provide a basis for pausing rate cuts in November. This indicates that the Federal Reserve has opened the door to not cutting rates in November, once again shocking the market by casting a "deep-water bomb" of "pausing a rate cut" on top of Powell's基调 of "not rushing to cut rates quickly" a week ago.

Subsequently, a journalist known as the "New Fed Wire" commented on October 11th, stating that the U.S. September CPI was a mixed bag, and the path to cooling inflation continues to be bumpy. The journalist directly quoted Bostic's view against a rate cut in November, without citing the views of other Federal Reserve members who support rate cuts, which is noteworthy. Analysis suggests that this might be instigated by Powell, to prematurely signal to the market the determination to stop cutting rates once.

It is evident that following Powell's hawkish tone of "not rushing to cut rates quickly" at the National Association for Business Economics conference on October 1st, which mercilessly doused some more extreme expectations for future rate cuts, the market has once again been hit with a "deep-water bomb," dealing another heavy blow to the U.S. financial market.

In fact, the Federal Reserve's September rate policy meeting minutes released on October 10th have officially laid their cards on the table for the market, sending out a resounding hawkish declaration of war, and sending out the latest signal of a dollar cycle harvest shift to the global market, catching it off guard. This also implies that the world has been deceived by the Federal Reserve's previous dovish stance.

At the same time, overnight, the monetary policy tone of all Federal Reserve members has shifted to "cautious," "gradual," "balanced," and "data-dependent," contrasting sharply with their dovish tone last week, which hinted at continued significant rate cuts and surrendering to the market. This has led to Wall Street's expectation that the probability of the Federal Reserve pausing rate cuts at the November rate meeting has risen to 23%, higher than the previous 17% and 12%.

This indicates that the Federal Reserve has cast a "deep-water bomb," possibly using the reversal of rate cut expectations to influence the fluctuations of the U.S. dollar index to achieve the purpose of harvesting or financial warfare, in order to prevent a mass exodus of capital from the U.S. financial market. This is the logic behind why the Federal Reserve continues to withdraw money through quantitative tightening while maintaining a loose monetary policy.

However, the awakening of the strong U.S. dollar and the U.S. Treasury market have already begun to price in a pause in rate cuts for November. As of October 11th, the benchmark 10-year U.S. Treasury yield has reached a new high of 4.12% over eight weeks, and has risen for six out of the past seven trading days. The weaker-than-expected 10-year Treasury auction on October 10th further pushed up the yield. The U.S. dollar against a basket of currencies has also risen to a seven-week high, further accelerating the pace of foreign buyers withdrawing from the U.S. financial and bond markets.This directly ignited market concerns about the United States' ability to repay its debts, making investors increasingly worried about the high cost of servicing U.S. debt. This indicates that Wall Street's "buy the rumor, sell the fact" will be proven true, and the U.S. financial market may face another major liquidation, reaching its most dangerous moment.

Analysts believe that no matter who wins the election in November, it will increase U.S. debt and push up inflation. The U.S. Congressional Budget Office estimated on October 10th that the deficit for the just-ended fiscal year 2024 will reach $1.9 trillion, higher than the previous fiscal year's $1.7 trillion. Debt interest payments currently account for 13% of public spending, the highest proportion since 2000. Currently, the United States' unpaid public debt has soared to $35.7 trillion, and it is increasing by tens of millions of dollars per hour in real-time.

This is even more evident against the backdrop of the United States' sovereign credit rating potentially being downgraded again due to insufficient debt reduction efforts, leading to more expensive financing costs for the United States.

At the same time, the Federal Reserve's report released on October 4th stated that due to paying more interest costs to banks, its loss for the fiscal year 2024 has exceeded $200 billion, marking the third consecutive year of losses. This indicates that the Federal Reserve may be on the verge of bankruptcy, resulting in a negative $200 billion in profits handed over to the U.S. Treasury, further weakening the Federal Reserve's ability to help finance the federal government. The massive losses of the Federal Reserve stem from its high-interest-rate monetary policy path, which has been pursued to reduce inflation.

For the U.S. financial market, the worse is yet to come. Data monitored by Goldman Sachs on October 11th shows that the five-year credit default swap (CDS) price for U.S. sovereign debt has risen to more than 37 basis points, up 15.7% since September, reaching the highest level since June last year. Moreover, the credit spread for U.S. federal debt is widening, indicating a surge in the risk of U.S. sovereign credit default.

This indicates that part of the reason for the recent increase in U.S. Treasury yields is Wall Street traders' hedging against the imminent risk of U.S. Treasury default and the U.S. financial market. This contrasts with the Federal Reserve's interest rate reduction cycle, as the market-priced borrowing costs have not correspondingly decreased. This will directly affect the repricing of trillions of dollars in U.S. Treasury debt, indicating that the Federal Reserve is losing control over the borrowing costs of U.S. Treasury debt.

This further confirms that no matter how the Federal Reserve chooses the pace of interest rate cuts next, the U.S. financial market is already on the eve of a storm, and the worst moment may be about to arrive.

A recent report updated and released by U.S. financial technology institution Affirm on October 5th also shows that nearly 65% of Americans believe the U.S. economy has already fallen into a recession, six percentage points higher than last month's survey data. This is corroborated by the U.S. Department of Labor's latest announcement of a surge in the number of initial jobless claims to the highest level in a year last week, forming a stark contrast with the strong September non-farm data. The U.S. election, which is currently in unprecedented internal strife, may also be becoming another catalyst for the impending U.S. economic recession.

According to former U.S. Treasury Secretary Summers' statement in a media interview on October 8th, the strong September non-farm employment data did not change my expectation that the U.S. economy is in recession. At the same time, the surge in U.S. Treasury yields and the chaos of the U.S. election will also accelerate the speed of the U.S. economic recession, which has sounded the call for Wall Street hedge fund managers to retreat from the U.S. asset price market.

Subsequently, Wall Street prophet Peter Schiff further analyzed in a report updated and published on October 11th that the Federal Reserve will make a major policy mistake. With the arrival of the economic recession, quantitative easing will return following interest rate cuts, leading to more debt and deficits, and driving inflation to surge again. This will crush the U.S. dollar and U.S. debt.This indicates that the United States is once again facing a historic debt default and an economic recession, which have become two self-fulfilling prophecies. Combined with the historical experience of two previous technical defaults in the U.S., and against the backdrop of the Federal Reserve's latest signal for a new round of capital harvesting, this will accelerate the pace of smart money's mass exodus. At least, it is likely to cause the $36 trillion of international funds that are pressuring the Federal Reserve to adopt aggressive interest rate cuts to withdraw from the U.S. market within a few years.

This includes iconic American assets such as U.S. Treasury bonds, U.S. securities, U.S. real estate, and U.S. bank deposits. For instance, the nearly $6.5 trillion in money market funds within the current U.S. banking system is also shifting its focus eastward to avoid losses in this hurricane-like cycle of U.S. wealth harvesting. This could also be one of the reasons why Warren Buffett is leading a fire sale of U.S. bank stocks at a record pace.

It is worth noting that former U.S. Treasury Secretary Lawrence Summers has expressed that his only concern now is that people on Wall Street have lost their fear. This is because, for Wall Street, this is the Federal Reserve's latest signal for a new round of capital harvesting tides. What kind of financial storm will be experienced in the future is perhaps unpredictable, and no one can escape it. The next significant adjustment in the U.S. financial market may be imminent.

This suggests that the next recession in the United States may not only be a cyclical economic downturn but could also trigger a debt crisis in the country. At the same time, the U.S. dollar is likely to enter a new era of depreciation. It is advised that readers should prepare in advance.