Rapid Interest Rate Cuts, Facing Heavy Criticism?

Recently, many people have focused on the US and Chinese stock markets, but little do they know that an epic reckoning seems to be happening within the United States.

The US Treasury bonds, which the country relies on for survival, have collapsed, and while the US dollar is strengthening, the Treasury bonds are not doing well, and even the Federal Reserve has been questioned.

Strong economic data, turbulent US elections, and the resurgence of inflation concerns, the United States is now in turmoil.

Why are US Treasury bonds being heavily sold off? Why is the Federal Reserve, which has entered a rate-cutting cycle, still shrinking its balance sheet? Is the US dollar really as stable as Yellen said?

Was the interest rate cut too hasty?

When it comes to the United States, you never know who is right, only interests are the most real.

In September, the Federal Reserve announced a 50 basis point rate cut, and at that time, the market predicted that it was because the US economy had shown signs of recession. Although inflation in the United States had not yet reached the expected goal, the United States had also started to cut interest rates, and it was a 50 basis point cut at once. Such a large magnitude, the US economy may really be entering a recession.

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At that time, no one in the market said anything bad about the Federal Reserve's actions, as if the Federal Reserve's interest rate cuts were within everyone's expectations.

However, on October 4th, the US non-farm data for September showed that the US economy, which had basically announced its entry into a recession a month ago, is now very strong.Next came concerns about inflation in the United States, with the Federal Reserve cutting interest rates by 50 basis points in September, suddenly becoming the target of public criticism.

On October 25th, Kevin Warsh, a former U.S. governor, openly criticized the Federal Reserve in an interview, claiming that the policies previously announced by the Fed were contradictory to the September rate cut. He stated that while the Federal Reserve emphasized inflation, it seemed to disregard U.S. inflation during the rate cut. Does this contradictory behavior of the Federal Reserve once again confirm Trump's claim of playing politics?

A series of hawkish statements led to the awakening of the strong U.S. dollar, which rose 4.3 points directly from 100 points, a speed that surprisingly occurred during the U.S. rate-cutting cycle.

Before the rate cut was initiated, the U.S. began to aggressively withdraw a large amount of liquidity from all over the world, causing the global financial market to bear tremendous pressure.

But now, while the Federal Reserve should have chosen to continue cutting rates to deal with this situation, the market has become increasingly turbulent due to the continuous release of hawkish statements and chaotic expectation management.

At this time, investors began to feel confused, wondering whether they should trust the various economic data released by the United States or listen to the various statements of high-ranking Federal Reserve officials.

The ultimate outcome is that the market has fallen into a state of chaos and anxiety, with no one being able to predict what will happen in the future.

Fierce Selling Wave

Just as the market was confused, the capitalists on Wall Street had already begun to take action.Given that the U.S. economic data indicates that the American economy remains robust, and conversely, concerns about U.S. inflation are escalating, it raises the question of whether the U.S. needs to lower interest rates anymore.

In the U.S. Treasury market, the volume of U.S. Treasury bond sales is unprecedentedly large, even setting a record for the highest in nearly half a year. Concurrently, its interest rates have soared, almost returning to levels around July of this year, with a peak reaching 4.2%.

You may not be aware that the 10-year U.S. Treasury bond is globally regarded as a benchmark for pricing. Therefore, when interest rates suddenly rise, it implies that there is a frantic sell-off of U.S. Treasury bonds, which undoubtedly increases the difficulty for the U.S. to borrow money.

This large-scale sell-off is not only suppressing the U.S. bond market but also exerting significant pressure on the entire global market.

In just a month, the value of the U.S. dollar has skyrocketed by over 3%, and when converted to Japanese yen, it has soared to above 150, prompting Japanese officials to warn about the potential for a sharp decline in the yen.

As for the Mexican peso, it is also under immense selling pressure.

When the U.S. released a very impressive employment report, the market's speculation about the need for significant interest rate cuts was instantly shattered, and investors' sentiments were also considerably impacted.

In addition to this, the U.S. election is another reason for the market to believe in a slowdown in U.S. rate cuts.

Currently, it seems that Trump's chances of moving into the White House are increasing. If Trump is elected, it means that his escalated trade war will also be put into action.

Externally, this will inevitably affect various exporting countries. Internally, the direct impact of tariffs is that American consumers will have to spend more money to buy the same products, which means that U.S. inflation will soon reignite.Various signs indicate that whether the United States will cut interest rates this year remains a significant challenge.

The Dilemma of the Dollar Hegemony

A more critical point is that the United States initiated interest rate cuts in September, but at the same time as the rate cuts, the Federal Reserve is also reducing its balance sheet.

What is a balance sheet reduction?

The term "balance sheet" refers to the financial statement that outlines a company's or government's assets and liabilities. In layman's terms, when the U.S. government runs out of money, the Treasury Department issues bonds to borrow from the market. However, the largest holder of U.S. debt is the Federal Reserve itself.

This means that the Federal Reserve prints money to buy the bonds, which is known as expanding the balance sheet and releasing liquidity into the market.

Reducing the balance sheet involves the Federal Reserve selling bonds, which in turn withdraws liquidity from the market.

On one hand, there are interest rate cuts, and on the other, there is a reduction in the balance sheet. This seemingly contradictory behavior is actually a reflection of the complexity of the U.S. economy.

Interest rate cuts are needed for a potential U.S. economic recession, while balance sheet reduction is necessary to curb U.S. inflation.

However, the United States is currently facing a dilemma: if interest rates are cut, U.S. inflation may reignite, and capital could flow out more rapidly. If interest rates are raised, how can the high debt levels in the United States be addressed?On one side lies the dollar hegemony, and on the other side stands the U.S. debt that sustains the foundation of America. What choice does the United States have?

For the current United States, the options are indeed limited.

The debt issue looms over the U.S. economy like a heavy black swan, and the troubling inflation is equally suffocating.

What's worse, the financial situation in the United States shows no signs of improvement but rather a downward trend. This not only implies that the black swan will fly faster in the future but also suggests that even if the status of the dollar can be preserved today, how long can it last if it continues to sacrifice national interests to maintain that status?