Report: If Inflation Data is Strong in the Coming Weeks, Waller is Prepared to Raise Rates in September

Author: Bu Shuqing, Wall Street Insights

According to a report by the Financial Times on Thursday, if inflation data remains strong in the coming weeks and market expectations for rate hikes increase, Federal Reserve Chair Waller is prepared to raise rates at the September meeting.

As a result of this news, U.S. short-term Treasury yields rose. Despite a massive sell-off of U.S. Treasuries following last week's meeting, Waller has insisted on maintaining a streamlined communication strategy.

Sources familiar with Waller's thinking say he acknowledges that there have been communication missteps since he took office as Fed Chair, including failing to adequately reinforce the core message regarding price stability and creating market confusion over whether long-term reform plans would affect short-term monetary policy. However, these sources maintain that these missteps are not enough to overturn the overall direction of reform.

After last week's Fed meeting, U.S. long-term Treasury yields surged sharply, with the 30-year Treasury yield reaching its highest level since 2007. Investors generally believe that Waller's limited information disclosure has weakened his credibility in combating inflation, while inflationary pressures stemming from Trump's war on Iran have further exacerbated market uncertainty regarding the interest rate outlook.

Sticking to Streamlined Communication, Not Yielding to Market Pressure

Since taking office as Fed Chair in May, Waller's most significant policy shift has been a substantial reduction in forward guidance to the market. His predecessors, Powell, Yellen, and Bernanke, all aimed to provide detailed economic outlooks and policy signals, while Waller has taken the opposite approach.

Since leaving the Fed in 2011, Waller has publicly criticized the "forward guidance" approach multiple times, arguing that it has trapped successive chairs in their own words and led to excessive policy commitments.

He believes that a more streamlined communication strategy will allow officials to better gauge the market's true assessment of economic health, thereby reducing policy missteps.

Waller has publicly stated that the "trigger men" in the bond market who make real investment decisions understand his approach, while criticism mainly comes from those "without investment responsibility, who can only succeed when everything is carefully orchestrated."

Eric Wallerstein, Chief Macro Strategist at Clocktower Group and former Fed Governor Stephen Miran's advisor, stated, "I don't understand where the market's negative sentiment towards Waller is coming from."

Probability of Rate Hike in September Rises to 55%, Rates Remain Primary Tool

According to CME Group data, the futures market currently estimates the probability of a 25 basis point rate hike at the September meeting to be around 55%.

Sources indicate that although Waller has suggested the possibility of reducing the Fed's $6.7 trillion balance sheet to tighten monetary policy, rates remain the primary tool and will be utilized in subsequent meetings if necessary.

The Fed's preferred inflation measure recorded 3.7% in June, having deviated from the 2% target for over five years. The market's benchmark inflation expectation indicator—inflation swaps—shows that investors expect an average inflation rate of about 2.4% over the next five years (starting from five years out), which has recently declined. Sources believe this indicates that the market still trusts the Fed's commitment to achieving price stability.

Torsten Sløk, Chief Economist at Apollo Global Management, stated, Waller was treated unfairly last week, "there is an increasing consensus in the market that forward guidance is not a good idea, as it leaves central banks with too little flexibility." However, he also pointed out that Waller could do more in explaining plans to reduce inflation.

Jackson Hole Speech May Be a Key Turning Point

Sources say that any significant reform of the monetary policy-making process will be delayed until next year, when the working groups established by Waller during his first press conference in June will submit reports to the Federal Open Market Committee.

Waller is expected to deliver his first speech at the Jackson Hole annual meeting hosted by the Kansas City Fed this month. This highly anticipated event is seen as an opportunity for him to clarify the theoretical framework behind his "silent revolution," including addressing perceived shortcomings in his information dissemination.

Eric Wallerstein anticipates, "This speech will showcase his intention to leave his mark. The central bank has gone through a difficult period with many missteps, including those of the Fed itself. Waller wants to confront all of this and attempt to correct the course.**