Fed's 25bp Rate Hike Seen Insufficient for Bond Markets; December Increase Expected

Srī-Kumār Global Strategies Chairman Srī-Kumār stated that the Federal Reserve's 25 basis point interest rate hike was insufficient to calm bond markets, forecasting another possible increase before year-end. Speaking during a September 17 interview with David Lin, he argued that a 50 basis point hike would have been necessary for the Fed to demonstrate serious inflation response, suggesting political considerations outweighed economic judgment in this decision.

He cited the U.S. fiscal situation as the core reason for high long-term bond yields, noting federal debt surpassed $40 trillion by August and annual deficits run at $200 billion, with interest payments now exceeding defense spending. While the Fed referenced strong economy, capital competition, and geopolitical factors for rate hikes, he emphasized that critical fiscal issues were overlooked.

Despite the Fed's announcement, bond yields have continued to rise rather than fall. He stated that if the Fed intended a single move, it should have raised rates by 50 basis points. The CEO also criticized the lack of clear forward guidance regarding additional rate hikes, predicting two increases this year with the second likely coming in December rather than October due to proximity to midterm elections.

Regarding economic rationale, he argued there was no justification for a 25 basis point hike instead of 50. While productivity improvements could lower prices, increased AI-related investment spending by companies competing for capital has offset this effect, contributing to inflationary pressure alongside rising energy costs. He stressed that regardless of whether inflation stems from supply shocks or rapid growth, the solution remains curbing demand.