The U.S. Federal Reserve Chairman, Kevin Walsh, stated during a House hearing yesterday: "Members of our committee have a resolute commitment to zero tolerance for persistently high inflation." Prior to Walsh's remarks, the U.S. Bureau of Labor Statistics released the June Consumer Price Index (CPI) data. The annual rate dropped from 4.2% to 3.5%, falling below market expectations, while the core annual rate decreased from 2.9% to 2.6%, also missing forecasts.
The unexpectedly low CPI data impacted the U.S. Dollar Index, leading to significant gains for gold, silver, and U.S. stocks. Although Walsh's comments were hawkish in tone, they failed to effectively bolster market confidence, and the U.S. Dollar Index fell below the key 101.00 level.
Kevin Walsh's testimony lasted approximately three hours. While the overall stance was hawkish, the lengthy duration diluted market focus, causing the correlation between market movements and his statements to gradually weaken. For the Federal Reserve's long-term policy adjustments, Walsh's remarks hold significant guiding importance.
Kevin Walsh indicated that the Federal Reserve will seek to engage in deeper discussions and reduce the frequency of its public statements. He did not imply that "the Fed would not expand its balance sheet size during a crisis." He also cautioned against complacency or a "mission accomplished" mentality simply because the CPI recorded its first decline in six years for the month. From these statements, it is evident that Walsh remains steadfast in executing his principle of "reducing the Fed's forward guidance," discouraging Fed officials from giving excessive interviews or signaling interest rate adjustments. Walsh is also actively trying to avoid being labeled by market participants, such as previously being seen as a Trump "proxy" or now being perceived as "firmly committed to balance sheet reduction."
While the volatility in gold, silver, and U.S. stock markets captures attention, the core driver behind these price movements is interest rate expectations. The 4-week U.S. Treasury yield stands at 3.71%, which is 0.02 percentage points lower than the 8-week yield of 3.73%, indicating a low probability of a rate hike. The 4-week yield is 0.11 percentage points lower than the 3-month yield, suggesting a slightly increased but still low probability of a hike. The 4-week yield is 0.22 percentage points lower than the 6-month yield, a difference close to the magnitude of a 25-basis-point single rate adjustment, pointing to a higher probability of a rate hike. Based on this analysis, regardless of fluctuations in U.S. CPI data or Kevin Walsh's commentary, the Federal Reserve is highly likely to implement one interest rate hike in the second half of the year, particularly towards year-end.
Until the next CPI data release, market expectations for a reduced risk of high U.S. inflation are expected to continue dominating price action. The U.S. Dollar Index may face downward pressure, while gold, silver, non-U.S. currencies, and U.S. stock markets could receive support. In the short term, close attention must be paid to geopolitical tensions in the Middle East. If the Strait of Hormuz remains closed for an extended period and neither the U.S. nor Iran shows willingness to compromise, a new round of energy price shocks may become unavoidable, potentially leading to higher CPI readings in the subsequent months.
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