Where to Begin
Fidelity International's Global Head of Macro & Strategic Asset Allocation, Salman Ahmed, noted that the US Federal Reserve kept rates unchanged for the fifth consecutive time, holding the federal funds rate at 3.5% to 3.75%, as expected. The decision passed with a 9-3 vote, with three dissenting members favoring a 0.25% rate hike.
Following the meeting, the market further reduced the likelihood of a near-term rate increase, leading to a steepening of the yield curve. Short-term yields fell as September rate hike expectations cooled, while long-term bonds were sold off due to ongoing uncertainties around medium- to long-term inflation, fiscal policy, and the broader outlook. The 30-year Treasury yield surged 11 basis points to 5.20%, its highest since July 2007.
Meanwhile, US stocks broadly declined as President Trump threatened to "strike hard" against Iran, escalating Middle East tensions and pushing Brent crude oil briefly above $90. Concerns over AI-related capital expenditure, potential supply gluts, and rising long-term yields added to the selling pressure. Semiconductor and memory stocks led the downturn, with most large-cap tech shares falling.
Why the Fed Might Wait Until December
Fidelity believes the Fed is more likely to delay the start of its rate hike cycle until December, provided that inflation and labor market data remain strong. However, economic data and geopolitical developments over the next two months could still reignite inflation risks, meaning the possibility of a September rate hike has not been entirely eliminated.
More importantly, this decision highlights the hallmark of the Warsh era: without a clear policy framework or forward guidance, the Fed will rely more heavily on real-time economic data and shifts in financial conditions. This suggests market expectations for the policy path may be adjusted frequently, and interest rates and asset prices will be more susceptible to volatility driven by data and official statements. Elevated policy uncertainty and market fluctuations may become the new normal.
Market Volatility and Investment Outlook
Recent tensions between the US and Iran, along with rising investor concerns over AI-related capital spending, potential supply gluts, and climbing long-term bond yields, have increased market volatility. Nevertheless, these factors currently affect market sentiment and valuations more than the underlying fundamentals of the global economy and corporate earnings.
Corporate earnings remain solid, with fiscal policy and AI investment continuing to support economic activity. AI remains a key long-term growth theme, and the global economic expansion has not been interrupted, which still favors risk assets in the medium to long term.
In terms of investment strategy, Fidelity maintains an overweight position in equities, favoring Japan and emerging markets due to their attractive valuations and earnings momentum. However, US large-cap tech stocks are trading at high valuations, warranting caution regarding market concentration and AI investment returns.
On the bond side, factors such as inflation, fiscal expansion, and policy uncertainty may limit the scope for long-term yields to decline, so Fidelity maintains a neutral stance on government bonds. Given that credit spreads have narrowed significantly, the firm remains cautious on credit bonds. Investors can navigate the current volatile environment by dynamically adjusting a global multi-asset strategy, focusing on quality companies, and incorporating a globally diversified dividend strategy and high-quality bonds to pursue stable, long-term returns.
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