The Fed’s messaging remained hawkish on Thursday. Fed Governor Christopher Waller said in Turkey that, if the data come in as expected, he anticipates further rate hikes to bring inflation back down to 2% more quickly. He added that rate hikes “don’t have to happen at every consecutive meeting,” leaving the door open for the Fed to skip a meeting. St. Louis Fed President Alberto Musalem was more direct: further tightening is needed to prevent supply shocks and demand from pushing inflation higher again. He envisages bringing inflation back to target in about 18 months.
Interest-rate futures shifted in response. Markets currently expect the Fed to hold rates steady at its October meeting, but put the probability of a December hike at around 69%. Initial jobless claims fell to 197,000, slightly below expectations, suggesting the labor market has yet to cool significantly. With oil prices also back above $100 a barrel, it is difficult for officials to say they can “start discussing rate cuts.” Minutes from the European Central Bank meeting also showed that officials see upside risks to inflation but are reluctant to lay out a clear path amid geopolitical uncertainty.
For risk assets, this means discount rates may stay elevated longer than people expected this summer. Long-duration assets like tech stocks and cryptocurrencies are more sensitive to interest rates. Thursday’s sharp Nasdaq sell-off and Bitcoin’s continued pressure are both consistent with this theme.
My view: stop betting on “rate cuts coming soon.” Over the next few weeks, whichever proves dominant— inflation expectations, oil prices, or employment data—will determine whether the Fed pulls the trigger on a cut in December. Keep plenty of cash on hand, use less leverage, and shorten your portfolio’s duration.
In terms of positioning, I’d rather diversify across durations: use cash and short-term bonds as core holdings, and keep only enough stocks and crypto to withstand volatility. If expectations for December rate hikes continue to build, another round of valuation compression in high-priced growth stocks could be coming. Don’t go all-in betting that policymakers will “turn dovish.”
Put position management ahead of your market view: you can get the direction wrong, but you can’t afford to get leverage and concentration wrong.
The content above is for informational purposes only and does not constitute investment advice.