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#30年期美债收益率创19年新高 The risk of U.S. Treasury bonds is now visible to the naked eye, so will the Federal Reserve really raise interest rates in September? Raising interest rates will push up U.S. Treasury yields and increase the financing costs of the U.S. Treasury Department. ┈➤ The "ambiguous" relationship between the Federal Reserve and the federal government Although the Federal Reserve is independent, the relationship between the Fed and the Treasury is also "ambiguous." ╰✦ The Federal Reserve remits net profits to the federal government On one hand, although the Fed is self-sustaining, it must remit its remaining net profits to the U.S. government. The U.S. government does not provide any appropriations to the Fed. Moreover, after covering costs, paying dividends to member commercial banks, offsetting previous losses, and retaining earnings within legal limits, the Fed remits the vast majority of its net profits to the U.S. Treasury. ╰✦ Most of the Federal Reserve's income comes from U.S. Treasuries On the other hand, most of the Fed's income normally comes from holding U.S. Treasuries issued by the Treasury Department. The Fed injects dollar liquidity by purchasing Treasuries and mortgage-backed securities (MBS). Buying or reducing Treasuries is one of the main forms of QE/QT. Therefore, the Fed holds a large amount of Treasuries long-term, and the interest from these Treasuries is a major source of the Fed's income. Additionally, during QE, the Fed buys MBS and continues to hold them for some time afterward, which also generates interest income. But in most years, interest income from Treasuries is higher. As the bank for commercial banks, the Fed also earns income from discounting and lending services, but unless in crisis periods, this income is usually small. So overall, U.S. Treasuries are one of the main sources of the Fed's income. So, will the Fed raise rates without regard for Treasuries and the U.S. government? ┈➤ Does inflation necessarily require a rate hike? I have analyzed countless times that inflation caused by oil prices cannot be fundamentally cured by raising interest rates. Raising rates mainly serves to suppress wage growth expectations to curb the "wage-inflation" spiral. So, the expectation of a rate hike may also have this effect. Whether rates will be raised in September depends on data from the next two months, July and August. If CPI does not worsen, the Fed might still hold steady. ┈➤ Final thoughts On one hand, I do not believe a September rate hike is a done deal. Given the relationship between the Fed and the federal government, would the Fed really raise rates without any concern for the U.S. Treasury? On the other hand, the expectation of a September rate hike is already priced in; the rise in Treasury yields essentially means the market is already anticipating rate hikes. I believe balance sheet reduction might be more appropriate than rate hikes. Because balance sheet reduction also brings tightening expectations, helping to suppress wage growth expectations and curb the "wage-inflation" spiral. Observing the month-over-month growth rate of U.S. wages, there is no trend of accelerating wage growth. The difference between balance sheet reduction and rate hikes is that each rate hike is a one-time tightening, while balance sheet reduction is gradual tightening. During balance sheet reduction, Treasuries held by the Fed mature and are not fully repurchased, so the reduction in demand for Treasuries is gradual, causing relatively less impact. Wolsh's proposal is to reduce the balance sheet first, then cut rates. Of course, this is my personal view. The Fed's decision will likely depend on observing U.S.-Iran relations and inflation trends in July and August.