Gaozhan · Weekly Interest Rate Analysis | Are rate hike expectations heating up?! Yet the Middle East situation is entering its final stage, and oil prices appear to be steering the market toward rate cuts...

Issue No. 202610

In the previous column, we analyzed the narrowing path forinterest rate cutmonetary policy just before the dawn of the Wasserman era. Building on that analysis, this issue further examines the evolution of the policy landscape following Wasserman’s official assumption of office.

Last week,Kevin Warshwas sworn in at the White House asFederal Reserve Chair，FOMC Aprilminutes showed that a majority of officials leaned towardraising rates if necessary,Interest rate hike, and market pricing implies an expectation ofYear-endBeforea 25-basis-point rate hike. However, last weekUS Treasury bondsthe yield curve flashed flattening signals, with the 10Y-1Y spread narrowing to0.729%, as short-end yields rose while long-end yields fell, signaling mounting concerns over an economic slowdown.

This pattern is not an isolated event, but rather the result of three intertwined factors: leadership transition implementation, persistent inflation, and recession expectations. This article will analyzeInterest rate hikethe underlying logic behind the rising rate hike expectations.

▌FedWatch Data Quick View

According toCME FedWatchData, days until next decision:FOMCmeeting still24 days. Maintain interest rates3.50%-3.75%The probability remains at98.1%，Interest rate hiketo3.75%-4.00%Probability only1.9%. However, the interest rate swap market indicatesa year-end rate hikeprobability exceeding80%, with traders expecting a25-basis-point rate hike within the year. The divergence—stable near-term rates but hawkish forward pricing—reflectsa stance of观望 shifting toward tighteninghas become the mainstream expectation.

▌ Walsh Takes Office: Clear Signal of Independence

May 22，Kevin WarshSworn in at the White House as the 11th Chair of the Federal Reserve—the first since 1987. Trump emphasized non-interference in Walsh’s decisions, and Walsh stated he would lead“a reform-oriented”Federal Reserve.Hassettsaid Walsh would restore the Fed’s independence. With leadership transition uncertainty resolved, market focus has shifted to Walsh’s first policy remarks.

▌ FOMC Minutes and Yield Curve Signals

FOMC The April minutes showed most participants viewed continued disinflation as essential,Interest rate hikewith several officials leaning toward removing the dovish bias and expressing concerns that energy prices and tariffs could entrench inflation.May 18The market has reached a critical turning point: $U.S. 1-Year Treasury Bills Yield (US12M.BD)$ yields have risen to 3.849%, $U.S. 5-Year Treasury Notes Yield (US5Y.BD)$ climbed to 4.270%, but $U.S. 10-Year Treasury Notes Yield (US10Y.BD)$ pulled back to 4.578%, $U.S. 30-Year Treasury Bonds Yield (US30Y.BD)$ retreated to 5.088%, flattening of the yield curvesignals are emerging. The rise in short-end rates reflectsInterest rate hikeexpectations, while the decline at the long end signals economic slowdown and an influx of safe-haven capital.

On the institutional side, NomuraFull-year expectations are notinterest rate cut, with a Bank of America survey showing that more than half of investors believe the conditions have already been metInterest rate hike.CICCIt is expected thatPCEwill remain above3.5%for the full year, significantly above the 2% target. Multiple institutions agree that inflation stickiness and Middle East risks will continue to constrain room forinterest rate cut.

▌ Fed Internal Divergence: Hawkish voices gain significantly more influence

【Hawkish】FOMCMost participants leaned toward tightening if necessaryInterest rate hike, citing concerns over entrenched inflation and the potential escalation of Middle East conflicts.Wallerstated that if inflation expectations become unanchored, it would be especially necessaryInterest rate hike, supporting the removal of a dovish bias.

【Dovish} Some participants believed that inflation pressures would ease after the conflict is resolved,Year-endit would still be possible tointerest rate cut。Barkinstated that current policy is sufficient to address the shock, and long-term inflation expectations remain well-anchored.

【Centrists】Walleralso noted that policymakers should not rush toInterest rate hike, reflecting significant divisions within the decision-making body.

Currently, a majority of voting committee members support maintaining the status quo but with reservationsInterest rate hikeThe policy path remains highly dependent on upcoming data and developments in the Middle East situation.

▌ Other major central bank activities

People's Bank of China：May 25ConductedCNY 600 billion MLFoperation.May 27Will issue central bank bills via Hong Kong's CMU tender.Loan Prime RateUnchanged for 12 consecutive months; possibility of an RRR cut within the year still exists.interest rate cutThe possibility of a reserve requirement ratio (RRR) cut within the year still remains.

European Central Bank：Lagardestated that long-term inflation expectations remain anchored to the 2% target. The committeeDemarcostatedJunePossibleInterest rate hike, but economists warned that if it insists on proceeding,Interest rate hikeit could make a major mistake.

Bank of England: AprilCPIslowed to2.8%, lower than March's 3.3%.JPMorganis expected toInterest rate hikeforecast was pushed back fromJuneto July.

Bank of Japan: Committee memberJunko Koedabelieves inflation risks outweigh downside risks. The government is leaning toward caution, while the U.S. side is applying pressure.Interest rate hike，JuneThe meeting reached an impasse.

▌ Market Reaction: Crude oil plunge triggers asset repricing

Markets experienced significant volatility last week. $Crude Oil Futures (JUL6) (CLmain.US)$ Plummet4.11%to$97.00， $Brent Last Day Financial Futures (AUG6) (BZmain.US)$ Down4.85%to $103.94, with weekly swings reaching10.3%and over $11. Oil prices fell below the$100psychological threshold, with bears fully in control. $Gold Futures (AUG6) (GCmain.US)$ fell 0.73% to$4,510.5， $USD (USDindex.FX)$ edged up slightly to hold above the 99 level, as safe-haven flows favored the dollar overGold。U.S. Treasury yield curve flatteninghighlighting recession concerns andInterest rate hikethe tug-of-war over expectations.

▌ Historical perspective: Policy dilemmas amid curve flattening

Historical experience shows that a sustained narrowing of the spread between long- and short-term rates often signals an economic slowdown. The Federal Reserve faces a dilemma duringcurve flatteningperiods:Interest rate hikeAggressive inflation control could accelerate a recession, while inaction risks letting inflation spread. A core challenge for Waller early in his tenure is how to balance this contradiction.

▌ Closing Remarks

This episode differs from the previous one, with the central conflict shifting from"narrowing room for rate cuts"Shift in direction“Rate hikes alongside recession”——Curve flatteningadds uncertainty to the policy outlook. Investors should closely monitorJune FOMCthe meeting outcome and Waller’s first public remarks since taking office.

$S&P 500 Index (.SPX.US)$ $Nasdaq Composite Index (.IXIC.US)$ $Dow Jones Industrial Average (.DJI.US)$ $Hang Seng Index (800000.HK)$ $Hang Seng TECH Index (800700.HK)$ $Futu Holdings Ltd (FUTU.US)$

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