The July FOMC was a 'hawkish hold'—moving toward a phase of cautioning against further rate hikes rather than rate cuts

At the FOMC meeting held on July 28-29, it was decided to keep the policy interest rate unchanged at 3.50-3.75%.

At first glance, there is no change in monetary policy. However, I believe the content of this meeting was not merely a hold, but a 'hawkish hold' that maintains strong vigilance against inflation.

Policy interest rate held steady

The FOMC determined that while the U.S. economy is expanding steadily even in an environment of high uncertainty, the inflation rate remains above the 2% target.

Therefore, instead of raising rates immediately, the policy is to maintain the current interest rate level while monitoring future data on prices and employment.

What drew attention was that the vote was 9 to 3.

The three dissenting members argued for a 0.25% rate hike instead of a hold. It has become clear that there is a certain number of voices within the FOMC calling for rate hikes.

Not a return to a rate-cutting phase

It is a bit premature to interpret this result as 'a relief because there was no rate hike'.

FRB Chair Warsh reiterated his stance of prioritizing the 2% inflation target. On the other hand, he avoided giving a clear signal regarding policy for the next meeting, leaving room for additional tightening depending on future economic indicators.

In other words, the FRB has not shifted its direction toward rate cuts.

If inflation strengthens again, there is a possibility of a rate hike from September onwards. It should be viewed that they held interest rates steady this time as a preliminary step toward that.

Beware of rising long-term interest rates

What the market was particularly wary of was U.S. long-term interest rates.

After the FOMC, the yield on the U.S. 30-year Treasury bond briefly exceeded 5.2%, reaching its highest level since 2007. Even if the policy rate is held steady, long-term interest rates will rise if the bond market is wary of future inflation or fiscal risks.

This is a headwind for ultra-long-term bonds such as TLT and EDV.

Long-term bond prices fall significantly when interest rates rise. Just because yields have become higher, one should not buy all at once, but rather invest in stages while considering the possibility that interest rates may continue to rise.

Rising interest rates are also a burden on AI and semiconductor stocks

The rise in long-term interest rates is also a point of caution for AI and semiconductor stocks, which have high growth expectations priced in.

Because the present value of future earnings decreases, even companies with strong performance may see their stock prices fall due to valuation adjustments.

On the other hand, short-term bonds and money market funds continue to offer an environment where high interest can be earned with relatively low price volatility.

Rather than forcing funds into long-term bonds or high-P/E stocks, I believe it is also effective to earn interest through short-term bonds while confirming the direction of long-term interest rates and inflation.

My thoughts

In the current U.S. market, how high long-term interest rates will rise has become more important than the policy rate itself.

If the yields on U.S. 10-year and 30-year bonds rise further, the impact will spread to a wide range of assets, including stocks, long-term bonds, and real estate.

Now is not the time to rush into investments just by looking at high yields.

I believe this is a phase to wait for investment opportunities while securing a certain amount of short-term bonds and cash, and monitoring inflation, crude oil prices, employment statistics, and U.S. long-term interest rates.