The probability of a Federal Reserve interest rate hike in the near term remains low. Current market concerns about Fed tightening are primarily anticipatory, based on assumptions of persistent domestic US inflation and a continuously hot labor market. Data from the CME FedWatch Tool indicates that overseas markets currently expect the most likely timing for a Fed rate hike to begin in late October 2026. The current global liquidity tightening and market adjustments represent an early reaction to expectations for a fourth-quarter rate hike.

For the domestic bond market, increased expectations of Fed tightening are not necessarily a negative factor. The domestic bond market operates with relative independence and has a weak correlation with US Treasuries. Furthermore, against a backdrop of ample domestic liquidity, anticipated tightening of overseas liquidity and adjustments in equity markets could potentially drive capital flows towards the bond market, supporting current long-term bond valuations. The yield on the 10-year government bond is expected to continue fluctuating around the 1.70% level. A sustained break below 1.70% would likely require the emergence of new, incremental domestic information.

Primary Objectives: The Dual Mandate

Unlike the Bank of Japan, the European Central Bank, and other major central banks, the Federal Reserve's monetary policy operates under multiple objectives. The Federal Reserve Act Amendments of 1977 established three statutory goals: maximum employment, stable prices, and moderate long-term interest rates. In economic theory, however, long-term interest rates are determined by factors like the savings rate and real output, making them a consequence of price and employment conditions. Therefore, in practice, the Fed primarily focuses on the dual goals of "maximum employment" and "price stability," collectively known as its "dual mandate."

Quantitative Benchmarks: Long-Term Inflation at 2%, Asymmetric Focus on Employment

In terms of specific numerical targets, "price stability" is anchored to a long-term inflation goal of 2%, while "maximum employment" lacks a specific numerical definition. Contrary to the perception of strict targeting and rapid two-way adjustments, the Fed's current framework adopts a more flexible and somewhat asymmetric approach towards both inflation and employment. The Fed permits inflation to run moderately above 2% for a period as compensation for historically low inflation, while also focusing more attention on employment shortfalls, displaying a higher tolerance for an overheated labor market.

Regarding prices, the Fed targets a 2% rate in the Personal Consumption Expenditures (PCE) index, but this refers to long-term average inflation. Inflation exceeding 2% does not automatically trigger immediate tightening. In 2012, the Federal Open Market Committee (FOMC) first explicitly established a formal long-term inflation target of 2% PCE. In 2020, the Fed updated its framework, introducing Flexible Average Inflation Targeting (FAIT), which allows for inflation to run moderately above 2% for some time to compensate for periods when it ran below that level. Under this new framework, PCE inflation above 2% does not prompt a swift rate hike, reflecting a higher tolerance for inflation and a greater priority placed on employment. The Fed has not explicitly defined the time window for "long-term" inflation, but research from institutions like the San Francisco Fed suggests an observation window of 1.5 to 2 years. In practice, to filter out short-term price volatility, the Fed's decision-making often focuses on core PCE growth. Additionally, the trimmed-mean PCE measure, advocated by the new Chair Wash, is another indicator for observing long-term US inflation trends.

For employment, the Fed employs a multi-dimensional assessment of maximum employment and explicitly states a greater focus on "shortfalls" in employment. The key metric is the U-3 official unemployment rate from the Bureau of Labor Statistics. Other important indicators include the labor force participation rate (LFPR), the employment-population ratio (EPOP), and the job openings rate (V/U). While non-farm payrolls (NFP) and ADP employment data hold a lower weight in the Fed's formal assessment due to their high frequency, they are mainstream focal points in financial markets. According to the Fed's March 2026 Summary of Economic Projections (SEP) assessment, the current median estimate for the natural rate of unemployment is 4.2%, slightly below the U-3 unemployment rate of 4.3% recorded in May 2026.

It is particularly important to note that the Fed's focus on employment is asymmetric, concentrating on "shortfalls" from maximum employment rather than "deviations" from it. In other words, the Fed is more inclined towards easing during periods of employment shortfalls but is not hasty to tighten during periods of employment strength. This new framework stems from an adjustment in the Fed's "Statement on Longer-Run Goals and Monetary Policy Strategy." The 2012 version aimed to mitigate "deviations of employment from the Committee's assessments of its maximum level," while the 2020 framework changed this to mitigate "shortfalls of employment from its maximum level."

The Decision-Making Process: FOMC Votes and Meetings

The decision-making body for Federal Reserve monetary policy is the Federal Open Market Committee (FOMC). It consists of 12 voting members, and resolutions are passed via a simple majority vote, with each member having one vote. The 12 voting members follow a "7+1+4" structure: seven are members of the Board of Governors (nominated by the President and confirmed by the Senate for 14-year terms), one is the President of the Federal Reserve Bank of New York, and four are regional Federal Reserve Bank presidents who serve one-year rotating terms from among the other 11 Reserve Banks. The Committee meets eight times a year for scheduled meetings to discuss monetary policy and can convene emergency meetings as needed.

The policy meeting process consists of two stages: preparatory work and the meeting itself. Preparations begin about two weeks before the meeting. Twelve days prior, the "Summary of Commentary on Current Economic Conditions by Federal Reserve District," commonly known as the "Beige Book," is released. This report provides micro-level economic survey data and serves as background for the meeting. In addition to the Beige Book, the Committee prepares other confidential internal reference materials. Federal Reserve Banks also submit written perspectives for Committee members to review and discuss in advance.

The policy meeting typically spans two days. On the first day, Committee members discuss the fundamental economic outlook. Fed economists present data on macroeconomics, finance, employment, and inflation. Regional Fed presidents share local economic conditions, and members engage in open discussion. No public information is released on the first day. On the second day, each member states their preferred monetary policy stance and votes. The final interest rate decision and policy statement are publicly released at 2:00 PM Eastern Time. The "FOMC Statement" is the official monetary policy announcement. In March, June, September, and December, this is accompanied by the release of the "dot plot" of interest rate projections and the Summary of Economic Projections (SEP).

Current Situation: Overseas Liquidity Tightening is Driven by Expectations

In the current context, the US core PCE year-on-year growth rate is 3.3%, and the trimmed-mean PCE is at 2.4%, both running above the inflation target for the time being. The unemployment rate is 4.3%, slightly above the neutral employment target estimate of 4.2%. In the short term, the probability of a Fed rate hike remains low. Market concerns about Fed tightening are primarily anticipatory, based on assumptions of sticky domestic US inflation and a persistently strong labor market. Data from the CME FedWatch Tool also shows that overseas markets currently see the most likely timing for a Fed rate hike starting in late October 2026. The current global liquidity tightening and market adjustments are an early reaction to fourth-quarter rate hike expectations, largely reflecting these changing anticipations.

For the domestic bond market, increased expectations of Fed tightening are not necessarily negative. The domestic bond market is relatively independent with a weak link to US Treasuries. Moreover, given ample domestic liquidity, anticipated tightening of overseas liquidity and adjustments in equity markets could potentially channel funds into the bond market, supporting current long-term bond valuations. The yield on the 10-year government bond is expected to continue fluctuating around the 1.70% level. A sustained break below 1.70% would likely require the emergence of new, incremental domestic information.

Key Risk Factors to Monitor

Overseas Market Volatility Risk: Prolonged inflation poses negative impacts on US and European markets, increasing corporate costs, dampening consumer demand, and raising prices for industrial and consumer goods. The repeated delays in the Fed's rate-cutting process, aimed at tackling inflation, objectively heighten the risk of a recession in overseas markets. The rise of anti-globalization sentiment overseas, particularly with the new administration, could also exert pressure on China's technological development and foreign trade.

Geopolitical Conflict Risk: Significant uncertainties remain regarding the Russia-Ukraine conflict and US-Iran tensions. The global geopolitical landscape remains unstable. Such conflicts could lead to volatility in global financial markets and even trigger regional systemic risks. The potential for global contagion of these risks must be considered and guarded against.

Accelerated Credit Expansion Risk: As policies to stabilize growth continue to be rolled out, the process of credit expansion is advancing, with ample supply of government bonds. The potential acceleration of credit expansion, driven by infrastructure and investment stimulus, could elevate market risk appetite. Given that the current liquidity environment is more complex than in recent years, a combination of rapid credit expansion and a swift shift in liquidity conditions could prompt a market rotation, leading to rising bond yields and falling prices.