--- title: "Has the interest rate hike cycle truly returned?" type: "News" locale: "en" url: "https://longbridge.com/en/news/293097594.md" description: "The article analyzes current interest rate trends, pointing out that the upward slope of short-term rates is flattening. The market generally believes this is not a traditional interest rate hike cycle, but rather policy fine-tuning. While the author agrees with this view, they outline two logical arguments supporting the possibility of entering a hike cycle and suggest waiting for more information at the end of the month to strengthen judgment" datetime: "2026-07-18T12:11:11.000Z" locales: - [zh-CN](https://longbridge.com/zh-CN/news/293097594.md) - [en](https://longbridge.com/en/news/293097594.md) - [zh-HK](https://longbridge.com/zh-HK/news/293097594.md) --- # Has the interest rate hike cycle truly returned? This week has been quite eventful in the markets. Without further ado, let’s get straight to the point, starting with interest rates and exchange rates, moving to the FOMC outlook, then to views on gold, copper, and commodities as a whole. Finally, I will share some thoughts on the overall market. I am not an expert in this last part; no one can fully understand all markets. However, having experienced such severe declines before, I believe discussing the market from different perspectives can be helpful. You will also find that the conclusions drawn using different methods in various sections of this article are sometimes even conflicting. This is precisely why I feel that waiting until the end of the month for more information will provide greater confidence in making judgments. Interest Rates: It does not look like a hike cycle, but we have not yet seen a turning point in rates. Thanks to the help of my former leaders and colleagues, I was able to establish an observation framework centered on interest rates and exchange rates. As shared previously, because I lacked understanding myself, consulting many senior friends led to a consensus among many big shots and veteran traders: look at more charts. **Let’s start with short-term interest rates** Since January 2026, short-term interest rates have risen steadily. Reasons include war and changes in Federal Reserve leadership. However, judging from the chart, the upward slope of short-term rates has been gradually flattening so far. This is similar to the second half of 2023 and the past few years, differing from the accelerated rise seen in 2021–2022. My understanding is this: when the Fed is determined to defeat inflation, it must be more hawkish than the market expects. This unexpectedly hawkish stance causes the market to repeatedly revise up its previous interest rate expectations, leading to the steeply rising slope of short-term rates seen in 2021–2022. This is also known as an interest rate hike cycle. If the Fed is dissatisfied with inflation but does not deem consecutive rate hikes necessary, rates will rise but hit a ceiling. What you see is a graph where the slope becomes flatter as it rises, just like today. This is also called fine-tuning, or policy fine-tuning. Currently, investment banks, the market, and Fed officials themselves all indicate that this does not look like a hike cycle. I agree with this view and also feel that, based on today’s data, the future does not look like a hike cycle. However, I always remember the story of 2022, so I list two logics supporting the possibility of currently entering a hike cycle. - Following traditional thinking, the Fed is already far behind the neutral rate - Currently, real interest rates in the US have been rising. If AI Capex continues to increase next year, the US economy will not perform poorly, inflation expectations will not drop, and real rates will continue to rise. An interest rate hike cycle is entirely possible. Real interest rates are rising. This cannot be solely because the traditional economy is doing well. If AI Capex growth continues at 60%, I believe real interest rates will not fall. Inflation expectations have reached a four-year low. If AI investment performs very well, the Fed will definitely not cut rates; it is even entirely possible that they may hike rates, discovering next year that further hikes are needed. I believe the flaws in the above two logics are: - Kevin Warsh’s stance is to cut rates and shrink the balance sheet. This aligns with the US focus on increasing supply. Moreover, data does not support a wage-price spiral, so there is no need to rigidly apply the traditional 2% inflation target or Taylor’s Rule to view the hike cycle. - Currently, the market is spontaneously helping the Fed hike rates. If AI investment continues to prosper under debt financing, the market itself can push rates higher. The Fed may not even need to act to partially achieve its goals. In 2022, when inflation expectations reached 3%, it was reasonable for the Fed to enter a hike cycle. But now, with inflation expectations at 2.2%, the situation is actually manageable. Therefore, we will discuss policy trade-offs again in the FOMC outlook below, but I indeed do not feel there will be a hike cycle at present. Holding steady in the short term appears to be the most likely course of action. The current situation is akin to this: because Warsh is not providing guidance, the market and Warsh’s colleagues are becoming increasingly hawkish. The ending of this narrative will either be inflation returning to a more reasonable level, or Warsh himself stepping forward to state his position. Both points require time; quickly, it might be within a quarter; slowly, it is hard to say. **Long-term Interest Rates: This looks more like the narrative of the 1970s** Long-term interest rates appear to have more upward momentum than short-term rates. I think this is completely reasonable because the market can sense the White House’s demand for rate cuts but cannot avoid the issue of the US fiscal deficit. I still remember when I first entered the industry, researching US PMI, I observed an interesting phenomenon: the volatility of US PMI was very rapid before the 1980s. Before the 1980s, the US economic cycle, like that of emerging markets, occurred every 14–18 quarters. After the 1980s, it changed to every 36–40 quarters. At that time, I was too young to understand why. There were many explanations, such as high inflation causing large economic fluctuations, or the Cold War leading to high fiscal spending. After these past few years, I believe there are two explanations I hadn’t considered before: - A textbook explanation of interest rates is compensation for default probability. When there are two major powers in the world, the probability of default is always higher than when one power dominates. - When we say emerging markets are volatile, we essentially mean that when dealing with certain economic fluctuations, they lack the experience of developed markets or have insufficient capital accumulation, resulting in inadequate risk management capabilities. However, large-scale technological revolutions have actually plunged developed countries into greater volatility as well. In the face of technological progress and geopolitical conflicts, even major powers lack experience. The capital required is similarly astronomical. Therefore, I believe that even if we see short-term rates decline in the future, the probability of long-term rates falling significantly is low, unless there is a black swan economic event. FOMC: I believe there are two options on the table. Holding steady + Data dependent is the base case assumption, while a 25bp hike is the surprise assumption. Generally, at FOMC meetings, participants vote on three options: dovish, neutral, and hawkish. Standing here today, considering the Fed’s previous meeting and everyone’s statements this month, a 25bp rate cut is highly unlikely to be the dovish option for this meeting. Therefore, the dovish option might be: - Keep rates unchanged + add attention to the unemployment rate in the statement I think the probability of this is almost zero, as it would mean changing the framework just one month after changing it last month. This is something Warsh is unwilling to do, and it does not align with any Fed official’s statements. The hawkish option is definitely: - Hike rates by 25bp. Current data does not actually support a 50bp hike option. The current probability of this is around 10–15%. But if you ask me, I don’t think the probability is necessarily that low. Not for any other reason, but simply due to the Strait of Hormuz issue. If tensions in the Strait of Hormuz escalate further in the next 10 days (which is entirely possible, as Iran seeks control while the US cannot concede), I think some voting members will recall Powell’s statement in March this year that oil price inflation is a short-term disturbance and the Fed will not consider hiking rates. Consequently, they may lean towards voting for a rate hike at this meeting. So, personally, I think the hawkish option of a 25bp hike is currently priced by the market at 10–15%, but if tensions in the Strait of Hormuz escalate in the next 10 days, this probability could actually be higher. This is indeed a risk worth paying close attention to, because geopolitics involves much uncertainty, and when linked together, their impact on the market compounds. This is another reason why I believe it is better to watch more and act less during this period. I have many vivid memories in financial markets: if one bad event leads to another bad event, or one good event follows another good event, the probability of two bad or two good events occurring consecutively is higher than it appears. The neutral option is naturally: - Hold steady, while emphasizing attention to inflation or price stability This is also the market’s current base case assumption. Risk Warning and Disclaimer The market carries risks; invest with caution. This article does not constitute personal investment advice, nor does it take into account the specific investment objectives, financial status, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. 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