Recently, there has been a lot of discussion in the financial world, with the focus on the Fed's interest rate policy. Many experts warn that if the Fed continues to delay interest rate cuts, it may push the U.S. economy into the abyss of deflation. Compared to inflation, the effects of deflation could be more severe: continuous price declines can lead consumers to delay purchases, businesses to reduce investment and lay off workers, ultimately causing the entire economy to come to a standstill.

The Fed adjusted its inflation management strategy this year, shifting from a previously flexible approach to a greater focus on current inflation data. Currently, the Consumer Price Index (CPI) fluctuates around 3%, and according to the new model, interest rate cuts seem far off. However, economic indicators have shown worrying signs: the manufacturing Purchasing Managers' Index (PMI) fell below the neutral line of 50 in July, and growth in the labor market and retail sector is slowing. This situation is reminiscent of the economic conditions in the early years of Japan's "lost three decades." At that time, the Bank of Japan hesitated and failed to cut interest rates in a timely manner, ultimately leading to entrenched deflationary expectations, and it had to adopt a zero interest rate policy to stabilize the economy.

Currently, there is a significant divergence between the market and the expectations of the Fed. The interest rate futures market predicts a probability of over 60% for a rate cut in September, but Fed Chairman Powell insists that there will be at most two rate cuts this year. The general public is also beginning to feel uneasy, with the consumer confidence index falling sharply by 12% in June, leading consumers to tighten their spending. If we really fall into a "debt-deflation spiral," it could trigger a series of chain reactions such as falling asset prices, collateral depreciation, and an increase in bank bad debts.

The key lies in the Fed's decision in September. Slowing down interest rate cuts may exacerbate the risk of deflation, while cutting rates too quickly could trigger a rebound in inflation. In this situation, finding the right balance will be a huge challenge. The Fed's decision not only concerns the U.S. economy but will also have a profound impact on global financial markets.