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Will interest rate hikes really happen? The latest statement from Federal Reserve Collins

Federal Reserve officials Collins has recently issued the following views:

1. The Federal Reserve may need to raise interest rates to ease inflationary pressures.

2. It is expected that the Federal Reserve will need to maintain restrictive policy for a period of time.

3. The current Federal Reserve policy is “in a good position” to deal with risks.

4. Monetary policy has been prepared and adjusted to respond to an ever-changing economic situation.

5. The U.S. is more resilient to energy shocks than in the past.

6. It is crucial that inflation expectations remain stable.

From an initial assessment of “impossible” to now a rising probability of market bets, “rate hikes” no longer appear to be a non-option for the Federal Reserve—and its impact on global financial markets is also evident:

1. Reinforcing expectations of “long-term high interest rates,” reshaping global capital flows

‌Tightening U.S. dollar liquidity and strengthening the exchange rate‌

Collins has made it clear that “interest rates need to be maintained at restrictive levels for a longer period,” and that “rate hikes are not ruled out,” directly pushing up U.S. dollar funding costs. Coupled with safe-haven demand triggered by the Middle East conflict, the U.S. Dollar Index may break through recent highs, intensifying depreciation pressure on emerging-market currencies (especially countries with high external debt such as Turkey and Argentina).

‌Accelerated cross-border capital returning to the U.S.‌

U.S. Treasury yields are expected to climb further on rate-hike expectations (the 10-year yield may break above 4.5%), and the spread between European and Japanese bond yields widens. This prompts international investors to reduce holdings of risk assets and shift to dollar-denominated assets. According to market forecasts (source 7), the probability of rate cuts by June 2026 has fallen to 2.3%, and 70% of investors expect no rate cuts throughout the year.

2. Restructuring the valuation framework for risk assets

‌Divergence under pressure for equity assets‌

‌U.S. stocks‌: Overvalued high-valuation tech stocks face sharp corrections, while energy and financial sectors with strong cash flow benefit relatively (bank net interest margins widen).

‌Emerging market stock markets‌: Capital outflows may lead to a 10%-15% decline in the MSCI Emerging Markets Index over the course of the year, especially in Southeast Asian markets that depend heavily on foreign capital.

‌Increased volatility in the bond market‌

Global sovereign bond yields move higher in tandem; Germany’s 10-year government bond may break above 3%, and the Bank of Japan is forced to scale back the intensity of its YCC intervention. High-yield corporate bond spreads widen to over 450 basis points (currently about 380 basis points), increasing refinancing risk.