The Fed's Decision to Hold Rates Steady Triggers U.S. Treasury Sell-Off, Market Tightening Effect Could Lead to Over 25 Basis Points Rate Hike

August 3rd, Federal Reserve Chair Kevin Wash decided last week to keep interest rates unchanged, but the bond market experienced significant volatility. A senior bond fund manager believes that the Fed's "hold" stance actually resulted in a stronger financial tightening effect than an actual rate hike would have.

Lantern Capital founder Eric Hickman stated that after the Fed's interest rate decision and Wash's press conference, as of last Friday's close, the market value of various US Treasuries, notes, and bonds with different maturities had collectively shrunk by approximately $115 billion.

Hickman calculated that if the Fed had chosen to raise rates by 25 basis points that week and assuming that bond yields within 5 years rose by 25 basis points simultaneously, the bond market would have lost approximately $65 billion in an extreme scenario, lower than the losses caused by the actual volatility.

He believes that Wash, by not directly raising the policy rate but instead allowing the market to repriced, achieved a stronger tightening effect while avoiding committing to maintaining higher rates in the long term.

Data shows that last Friday, the US 30-year Treasury yield rose to 5.229%, reaching a nearly 19-year high; the 10-year US Treasury yield rose to 4.688%, hitting the highest level since January 2025.

Hickman stated that it is still unclear whether Wash deliberately used market reactions to tighten policy, but Wash has always advocated reducing forward guidance, allowing the market to digest economic information on its own, a principle that was clearly reflected in this policy operation.

However, there is division within the Federal Reserve. St. Louis Fed President Musalem stated that monetary policy responsibility lies with the FOMC, not the financial markets, implying concerns about the approach of "relying on market adjustments to achieve policy effects."