Policy Tools are Financializing: Global Markets Trade Not Just Interest Rates, but Institutional Credibility

On August 4, global markets sent a common signal: governments around the world are intervening in market operations with unprecedented intensity. Investors are now focusing not just on economic data itself, but on whether policy tools still possess sufficient credibility and execution capability. The U.S. Treasury has raised its borrowing estimate for the third quarter to $739 billion, indicating that the supply pressure on U.S. Treasuries will continue to increase. On the other hand, Federal Reserve official Williams maintains the stance that inflation will ultimately return to 2%. However, in an environment where market expectations for the Fed's forward guidance are gradually diminishing and long-term yields remain high, what truly needs to be restored in monetary policy is the market's trust in the policy path, rather than just inflation expectations.

It is also noteworthy that Japan last week seemingly intervened in the foreign exchange market again with about $34 billion. Meanwhile, the U.S. Treasury publicly supports discussions to expand the FIMA tool, indicating that the goal of stabilizing the yen is no longer solely Japan's unilateral maintenance of the exchange rate, but also involves avoiding the impact of Japan selling off its large U.S. Treasury holdings on the global bond market. This shows that the U.S. is attempting to use financial tools to stabilize its allies while reducing the liquidity risks facing its own bond market. The focus of policy coordination has gradually extended from purely monetary policy to the stability of the global financial system.

On the other hand, the Trump administration is facing dual challenges both domestically and internationally. A coalition of 25 states has jointly sued over the latest tariff measures, reflecting that tariff policy has evolved from an international trade issue into a legal battle over domestic institutional and administrative authority in the U.S. Furthermore, Trump's public demand for oil companies to lower retail fuel prices highlights the increasing importance of energy prices on political support ratings. However, the real determining factor for oil prices remains whether the Strait of Hormuz can return to normal passage. Although Trump has signaled a willingness to negotiate, Iran has refused to fully reopen the strait, and there remains a significant gap in the narratives from both sides, suggesting that the risk premium on energy supply is unlikely to be completely eliminated in the short term.

It is worth noting that the U.S. is simultaneously advancing an AI governance framework, reflecting that AI competition is gradually extending from computing power, chips, and capital expenditure to the establishment of institutional and regulatory standards. As major economies simultaneously strengthen policy interventions in areas such as monetary policy, energy, technology, and trade, the future competition in global capital markets will not only be about corporate profitability but also about whether national policies possess consistency, predictability, and the ability to maintain market trust in institutional credibility. In such an environment, asset price fluctuations will increasingly stem from adjustments in policy expectations rather than changes in fundamentals.

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