Standard Chartered: The Market Underestimates Fed Disagreements; Risk Assets Face Volatility
Standard Chartered Bank's latest report indicates that investors may be underestimating the differences within the Federal Reserve regarding future policy directions. The bank believes that, although it was previously widely expected that the Fed would continue to cut interest rates by the end of the year, recent statements from Chairman Powell have been notably cautious, allowing room for the dollar and U.S. bond yields to rise again.
Steven Englander, Global Head of G-10 FX Research at Standard Chartered, pointed out that Powell, in his last press conference, unusually abandoned the neutral language of "data-dependent" and instead emphasized that the December rate cut is not a certainty. This suggests that there are significant differences within the Fed's decision-making body regarding economic assessment and risk tolerance.
Englander believes: "The market still considers rate cuts within the year as a mainstream expectation, but if the committee members' opinions are as divided as Powell suggested, the current yield structure may not fully reflect the risk."
Increased Uncertainty in Fed Policy Leads to Bond Market Volatility
Standard Chartered warned in its report that the dense schedule of speeches by Fed officials in the next two weeks could trigger short-term market volatility. Englander pointed out that the communication signals during this phase will determine the market's repricing of the December policy path.
"U.S. Treasury yields have consolidated at high levels, but may rise further," the report states, "especially as rate cut expectations diminish, the yield curve might experience a new round of steepening."
Currently, market data shows that the probability of a December rate cut, as bet by investors, has dropped from 90% before the meeting to about 60%, while the two-year U.S. Treasury yield has retested the 3.6% mark this week. Standard Chartered believes this adjustment is not yet over.
Standard Chartered Maintains “Strong Dollar” Outlook; Capital May Continue Flowing Back to the U.S.
Apart from interest rate factors, Standard Chartered also pointed out that the dollar's safe-haven attribute will further support its performance. Englander stated that in the context of uneven global economic recovery and divergent monetary policies among major central banks, the dollar will continue to remain relatively strong.
"The recent dollar adjustment was more due to technical profit-taking rather than a fundamental reversal," he emphasized, "As the market reinterprets the Fed's policy path, we expect the dollar to regain support in the coming weeks."
The report also notes that some emerging market currencies may face capital outflow pressure when the dollar strengthens again, especially in economies with high external financing dependence and limited foreign exchange reserves.
Fed "Internal Conflict" Becomes New Market Focus
Standard Chartered's report suggests that the core of this round of market volatility lies in the policy stance differences within the FOMC. Some officials focus on the slow decline of inflation and prefer to maintain restrictive rates, while others worry about employment and growth declines and advocate for a slower pace of easing.
This "hawk-dove standoff" makes Fed policy adjustments more uncertain in the future, indicating that the market may frequently sway between data and officials' statements.
Englander wrote: "Although Powell did not provide clear guidance, his remarks are enough to make investors aware that the Fed is weighing policy risks, and this hesitation itself will strengthen the resilience of the dollar and yields."
Dollar Might Continue Strong Performance; Bond Yields Expected to Break Through
Standard Chartered expects that without clear guidance on rate cuts, the market may reassess the interest rate curve before 2025. The report states that if the Fed delays the easing cycle, long-term U.S. Treasury yields could still rise another 10 to 20 basis points.
Additionally, Standard Chartered maintains an upward outlook on the dollar index, expecting a short-term target range of 104.5 to 106.0. Meanwhile, currencies like the British pound, euro, and Australian dollar among the G-10 may face further corrections.
Cautious Expectations Become Mainstream; Market Enters Policy Struggle Phase
Overall, Standard Chartered's analysis reveals the core risk currently faced by the market — the uncertainty of the Fed's policy path and communication differences. Englander concluded: "In the coming weeks, any unexpected data regarding inflation, employment, or fiscal policy could trigger market repricing."
For investors, this means that the dollar and U.S. bonds have not yet peaked, while the volatility of global risk assets may continue to rise.
