I actually did not watch the press conference of this FOMC, so I am discussing it based on the translation I saw during the day. This somewhat lacks a layer of understanding, as a person's facial expressions reveal many issues.

This is not because I didn’t want to watch, but because I fell asleep. The original plan was to watch the press conference at two-thirty, then write a brief commentary, and then sleep until morning to meet former leaders and friends to share views on the FOMC, then eat, eat, eat. The actual execution of the plan was that I saw Warsh for the first time at two-thirty and fell asleep, then went straight to eat with leaders and colleagues.

The plane is about to take off, so I’ll briefly share a few thoughts at this moment.

The overall thought is quite simple.

- The first interest rate hike generally does not bring too much disturbance to the economy or risk assets, but after a series of hikes or 2-3 hikes, it reaches a point where the narrative changes. This is similar to how after 2-3 cuts, the judgment shifts to whether the economy is actually weak or if it is a soft landing.

- The results of the midterm elections in two months will also be out, and many issues will resonate at that time.

So you can have a clear view here to make left-side trades, or if you don’t have a clear view, make right-side trades. I’m a bit lazy right now, so I just want to wait for the results to come out.

1. Is this the beginning of an interest rate hike cycle?

My feeling is that this does not completely depend on the Fed but is also influenced by fiscal policy. In recent years, it's been like this; when the Democrats increase fiscal deficits, they do not care whether the Fed raises rates, whereas when the Republicans increase fiscal deficits, they hope the Fed does not raise rates. But currently, the Trump administration has slowly lost influence over the Fed.

So how the fiscal policy plays out in the future, the political tolerance and acceptance of AI Capex, and the industry’s interest in AI Capex will determine the length of this interest rate hike cycle.

- If the Republicans continue to gain support, and the fiscal policy continues to expand, and the OBBBA bill continues, and AI Capex continues to increase, I actually think 2-3 interest rate hikes may not be enough to curb the strong momentum of the US economy. This could be a mistake for the Fed in 2025; during a strong fiscal period, they keep monetary policy loose, and with the Republican supply-side disturbance, rate cuts could be affected by rising inflation.

- Conversely, if the fiscal situation is not as positive and Capex is not as positive, then the Fed might only need to raise rates 2-3 times.

This is also what I mentioned earlier; I think the importance of the midterm elections may be similar to or even greater than that of the FOMC. I don’t think people will have enough certainty to formulate next year’s investment plans until the dust settles after the midterm elections. Over time, you may not have to wait until November to know the results, but I think the Fed's next actions are related not only to the data but also to the new fiscal policy for the next year.

2. The Fed’s view on the economy

I think the Fed's view on the economy is relatively fair; of course, they embellish the narrative of US economic growth. Currently, US interest rates and the overall financial environment put restrictions on traditional industries but not much on new industries. In total, this does not present significant restrictions on the entire economy. If the Fed insists on a 2% inflation target, actually, unless you see evidence that inflation is declining, it is completely possible for the Fed to raise rates consecutively.

Of course, you could say there are hidden worries about the US economy, but often when doing things, you can only focus on one side. The Fed cannot simultaneously say they want to curb inflation while also expressing concerns about economic issues; otherwise, it equals no rate hike. So they may be dovish in a few months, but during these months they can be hawkish to the point where you think there might be a mistake. December 2018 was like this; on December 17, they were still raising rates, and by December 26 or 28 they announced they would not raise rates, with less than ten days in between.

I believe the Fed is currently trying to curb the spread of inflation expectations; typically, I do not like to go long commodities at such times because the logic of the demand side is not smooth.

3. View on the market

I have shared before that I believe there won't necessarily be a particularly smooth long-term narrative before the midterm elections. In fact, in these two months, we first had the FOMC, then the meeting between US and Chinese leaders, and then the midterm elections. These events are somewhat interconnected.

Generally speaking, during the first interest rate hike, the market has some expectations, just like today’s dot plot suggesting two rate hikes this year; the market has also pushed up the two-year and ten-year interest rates. It’s hard to expect that such changes can lead to immediate effects. The real change happens after the second or third rate hike when everyone discusses whether the rate hikes are over or if we are entering an interest rate hike cycle.

This is like the mirror of rate cut trading; if you buy gold before rate cuts, generally, it can still be okay 2-3 times before the cuts, but after 2-3 cuts, you need to see whether the cuts have really bottomed the economy. If it's a soft landing, you should sell gold, or if the cuts are not enough and the economy declines quickly, you can add positions. After three cuts in September 2024, you wait for a few months and encounter liberation day. After three cuts in 2025, you meet the Strait of Hormuz. The differences are not more than that.

A friend asked me if I give too much weight to the midterm elections; I personally think:

First, at the beginning of the year, one risk project I discussed was that if the Democrats took the midterm elections and the results of Taiwan's nine-in-one elections were not satisfactory, a lot of geopolitical risks would increase. The Democrats and Republicans are completely 180-degree mirrors in domestic and foreign affairs. I really think it’s hard to ignore this uncertainty.

Secondly, I myself saw the SVB bank collapse in the spring of 2023, the Fed paused the interest rate hike cycle, and by September 2024 the FOMC made the first rate cut. In these eighteen months, there was a lot of discussion about the Fed's FOMC decisions and the economy, but actually, during that time, gold only fluctuated by $200, and after the rate cut in September 2024, gold rose by $2000. So I think discussing macro less on the left side and focusing more on the assets helps. On the right side, you can see the inflection points where positioning can occur. Spending too much time discussing macro in the chaotic period might be an interesting yet fruitless endeavor.

Of course, I may be wrong; for example, there might be a very good trending market before the midterm election results, and I might miss it. But I think that would be a new mistake, and if it really happens, I will accept it.

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