To be honest, this time, aside from raising rates and signaling a hawkish stance, there really isn’t much choice for the Fed.
But rate hikes themselves are not necessarily bad news—in fact, they could be positive.
After all, the market has already fully priced in the 25-basis-point rate increase.
The biggest contradiction right now is whether the Fed can get the bond market to believe again—whether the Fed truly has the resolve to bring inflation down.
The key variable is the 10-year U.S. Treasury real yield.
In simple terms, it’s the real return required for holding long-term dollar assets after stripping out inflation expectations. It’s also an important anchor for the risk-free discount rate used in valuing tech stocks.
Especially for semiconductor and AI-related companies, most of their value comes from cash flows over the next several years.
The higher the real yield, the less valuable those future cash flows become when discounted back to today, and valuation multiples naturally get squeezed.
The issue at the moment is that the 10-year real yield has already risen to a relatively high level—around 2.62%.
So, I actually hope the Fed’s stance tonight is firm enough.
If a 25-basis-point hike combined with hawkish messaging can convince the market that inflation will ultimately be controlled, then the long-term inflation risk premium should decline. That would also give room for long-end yields and real yields to peak and then fall.
For the semiconductor sector, that would mean a release of valuation pressure.
Next, the most worth watching is where the 10-year real yield goes after the rate hike.
If real yields start to fall after the Fed turns hawkish, it would suggest that the bond market has rebuilt confidence in the Fed.
And that—might be the result semiconductors most want to see.
$SOXL $NVDA $MU
But rate hikes themselves are not necessarily bad news—in fact, they could be positive.
After all, the market has already fully priced in the 25-basis-point rate increase.
The biggest contradiction right now is whether the Fed can get the bond market to believe again—whether the Fed truly has the resolve to bring inflation down.
The key variable is the 10-year U.S. Treasury real yield.
In simple terms, it’s the real return required for holding long-term dollar assets after stripping out inflation expectations. It’s also an important anchor for the risk-free discount rate used in valuing tech stocks.
Especially for semiconductor and AI-related companies, most of their value comes from cash flows over the next several years.
The higher the real yield, the less valuable those future cash flows become when discounted back to today, and valuation multiples naturally get squeezed.
The issue at the moment is that the 10-year real yield has already risen to a relatively high level—around 2.62%.
So, I actually hope the Fed’s stance tonight is firm enough.
If a 25-basis-point hike combined with hawkish messaging can convince the market that inflation will ultimately be controlled, then the long-term inflation risk premium should decline. That would also give room for long-end yields and real yields to peak and then fall.
For the semiconductor sector, that would mean a release of valuation pressure.
Next, the most worth watching is where the 10-year real yield goes after the rate hike.
If real yields start to fall after the Fed turns hawkish, it would suggest that the bond market has rebuilt confidence in the Fed.
And that—might be the result semiconductors most want to see.
$SOXL $NVDA $MU