Rate Hikes Are Not the End: The Real Test for the Federal Reserve and the U.S. Bond Market Has Just Begun

On September 16, the Federal Reserve's policy decision is entering its final stages, but market focus has gradually shifted away from whether or not to raise interest rates. What is more noteworthy is how the Federal Reserve explains its subsequent policies to the market and whether this action can re-establish expectations for controlling inflation. As the yield on the 10-year U.S. Treasury bond surpasses 5%, market pricing is no longer just about short-term policy rates, but is reassessing inflation, fiscal, and capital demand in the U.S. for the coming years.

This also represents a core limitation facing recent policy operations by the Federal Reserve. The Treasury Department is attempting to stabilize financial markets by expanding long-term Treasury bond repurchases and coordinating yen policies, but the actual effects show that while the government can influence market liquidity, it cannot directly determine long-term funding costs. As the scale of the deficit continues to expand, and with AI and infrastructure continuously absorbing capital, coupled with global investors reducing allocations to traditional long bonds, the market's demand for higher yields is no longer just a short-term sentiment but may gradually reflect a new equilibrium price.

Energy risks further complicate this issue. The conflict in the Middle East is not just pushing up oil prices; both major energy transport routes in Saudi Arabia are under pressure, and the Russia-Ukraine battlefield is further disrupting diesel and refining supplies. Energy supply itself is beginning to affect transportation and manufacturing, turning inflation from a price issue into a supply capacity issue. This will make it more difficult for central banks to quickly resolve issues through demand management.

At the same time, global capital markets are facing another structural change: AI continues to absorb a large amount of capital, but investors are starting to more carefully distinguish between "the actual productivity brought by AI" and "how much capital AI needs to maintain growth." If corporate capital expenditures continue to increase while simultaneously facing higher financing costs, the market will require not just revenue growth in the future, but also higher capital returns.

Therefore, what is truly worth paying attention to today is not the 25 basis points from the Federal Reserve, but whether policy actions can change the chain reaction between long-term interest rates, energy supply, and global capital allocation. If short-term policies tighten and long-term yields remain high, it indicates that the market's pricing of U.S. long-term inflation and fiscal risks may have diverged from a purely Federal Reserve cycle; conversely, if long-term yields stabilize again, it would mean that the market is beginning to believe that policies are sufficient to control inflation expectations. This will become a more significant watershed for asset pricing in September than a single rate hike.