Author: Wall Street Journal

Federal Reserve Chair Waller's debut at the Jackson Hole annual meeting on Friday was widely interpreted on Wall Street as a hawkish "correction" to the communication following the July FOMC meeting.

Waller's speech clearly reaffirmed that the 2% inflation target of the Federal Reserve is unwavering, stating that current overall financial conditions cannot be described as restrictive, and recent positive PCE and CPI data are insufficient to demonstrate a substantial improvement in core inflation trends. He bluntly stated that if there is no conviction that inflation is falling at a "clear and sufficiently rapid" pace, the Federal Reserve "still has work to do." Reuters reported that this was Waller's closest acknowledgment yet that a rate hike may be necessary.

Waller's remarks quickly shifted Wall Street's focus for the September FOMC meeting. Priya Misra, an investment professional at JPMorgan Asset Management, described it as a "hawkish speech," believing that Waller was forcefully reiterating the Federal Reserve's commitment to price stability and viewing it as a "cleanup" of the communication "misstep" from the July press conference; Aberdeen Investment Director Matthew Amis warned that if the Federal Reserve does not raise rates in September, its credibility could be hit again.

Barclays and Societe Generale both adjusted their forecasts for Federal Reserve policy based on Waller's speech at Jackson Hole, expecting the Federal Reserve to raise rates by 25 basis points in both September and December. Societe Generale also anticipated another rate hike in March.

Institutions like Wells Fargo and Fidelis Capital believe that Waller's speech has left enough room for a rate hike in the near term, though some institutions argue that he still did not provide a clear policy path for September action.

Reporter Nick Timiraos, known as "the new Federal Reserve correspondent," noted the core of the debate: Waller believes that financial conditions are not restrictive, and the recent improvement in inflation data did not convince him that the core trend has seen "meaningful improvement," yet he did not provide a specific policy path and did not clearly indicate support for a September rate hike. Timiraos summarized Waller's speech as: the Federal Reserve may not have finished the fight against inflation.

As a result, the market faces a more hawkish policy diagnosis, yet still lacks a definitive "reaction function." CME data showed that after Waller's remarks, the probability of a September rate hike rose from about 35% before the speech to about 50%; other market data even briefly indicated a further increase to around 60%.

Hawkish Speech Restores Anti-Inflation Credibility

Waller's speech primarily achieved a "correction" on the policy communication front.

Priya Misra from JPMorgan Asset Management expressed a very straightforward evaluation of Waller's speech:

“This was a hawkish speech.”

She believes that Waller was “forcefully indicating” that policymakers are dedicated to price stability. Misra is particularly focused on the relationship between this speech and the communication following the July FOMC meeting, referring to this speech as a strong response to what she sees as "communication mishaps" in the July press conference:

“This is a strong response to what I believe was poor communication in the July press conference.”

She even referred to it as a "clean-up act," a final correction of the July communication.

This sentiment was echoed by others in the industry.

Christopher Hodge, Chief U.S. Economist at Natixis, stated that Waller's speech represented a "significant improvement" compared to the July press conference, noting that the market had previously underestimated the possibility of a Federal Reserve rate hike, and now the pricing is more rational.

Hodge believes that by directly acknowledging the inflation issue, reaffirming the clear 2% target, and taking ownership of the Federal Reserve's institutional responsibility regarding inflation, Waller has strengthened his anti-inflation credibility.

Mark Hackett, Chief Market Strategist at Nationwide, believes that Waller successfully achieved his goal: to convey his position to the market without significantly disrupting it.

Hackett pointed out that the market previously had a misjudgment, thinking that the 2% inflation target might soften, but Waller has now clearly communicated to the market that this will not happen.

“He is reiterating hawkish positions in a more consistent rather than suddenly escalating manner.”

Hackett even summarized it as:

Don’t expect a rate cut soon; be prepared for rate hikes.

"New Federal Reserve Correspondent" Grabs Key Point: Financial Conditions Not Restrictive, Inflation Improvement Still Insufficient

Timiraos's summary of Waller's speech is even more focused on the policy assessment itself.

He pointed out that Waller believes overall financial conditions are not restrictive, and there are almost no clear signs of constraint in the credit and loan markets; at the same time, the recent better inflation data did not convince Waller that the core trend has improved.

Waller's exact words were:

“I find it difficult to describe overall financial conditions as restrictive.”

Regarding the recent inflation data, Waller stated:

“While the PCE and CPI data this summer were better than expected, that does not lead me to believe that the core trend has seen meaningful improvement.”

Timiraos specifically cited this line in his reporting and on social media.

In his view, this means that the market should not assume Waller has shifted to a more accommodative policy stance simply because inflation data has been better than expected in recent months. What Waller is truly focused on is whether the core inflation trend is persistently and quickly moving towards the 2% target.

Waller Provides Compass, Not GPS

Another prominent feature of Waller's speech: he clearly tells the market his policy principles but refuses to provide specific policy reaction functions.

Nathan Shetty, Chief Investment Officer at SEI Investments, believes that Waller's clear affirmation of the 2% PCE target is unwavering; therefore, the speech can only be understood as more hawkish.

However, Ellen Hazen, Chief Market Strategist at F.L. Putnam Investment Management, pointed out that Waller did not disclose the Federal Reserve's reaction function, leaving the market in a "black box" state.

Waller explained that excessive disclosure of policy reaction functions might, in turn, bind the Federal Reserve, much like the over-reliance on forward guidance in 2021.

Hazen believes this means Waller wants the Federal Reserve to maintain greater flexibility in the face of economic changes, but the market may not appreciate this approach.

Peter Andersen, founder of Andersen Capital, used a vivid metaphor:

Investors want a GPS, but the Federal Reserve is providing a compass.

In his view, investors hope Waller will explain in detail the economic outlook and policy path, but Waller is actually telling the market: the new Federal Reserve will not provide as much forward guidance as previous chairs, and the market must adapt to this "new regime."

"If No Rate Hike in September, Credibility Takes Another Hit": Wall Street Reassesses Near-Term Action

For the market, the most notable change is still that the September rate hike has moved from the periphery to a core discussion.

Matthew Amis, Investment Director at Aberdeen, believes that Waller's speech has set up a critical scenario for the September meeting:

“If they do not raise rates, credibility takes another hit.”

This statement effectively links Waller's anti-inflation remarks to September policy action: since Waller has clearly stated that core inflation must fall at a sufficiently rapid pace, or else the Federal Reserve "still has work to do," then if future data does not show significant improvement and the Fed remains on hold in September, the market may question the genuine policy weight of the Federal Reserve's previous hawkish statements.

Gary Schlossberg, Global Strategist at Wells Fargo Investment Institute, also believes that while Waller did not say it outright, the speech has effectively signaled at least one rate hike, possibly more.

He stated that unless inflation clearly falls—which he does not expect to occur—the inflation pressures could actually increase further in the next 6 to 8 months. Even if there is no rate hike in September, he believes the Federal Reserve will most likely take action earlier in the year.

Chris Gunster, Director of Fixed Income at Fidelis Capital, explicitly stated that the market now believes the probability of a September rate hike exceeds 50%.

He believes several factors mentioned by Waller—inflation still above target, a robust job market, and resilient economic performance—collectively provide the Federal Reserve with enough policy space for a rate hike in the near term.

Barclays and Societe Generale Forecast Rate Hikes in September and December

Barclays and Societe Generale both expect the Federal Reserve to raise rates by 25 basis points in both the September and December meetings.

Barclays' forecast in mid-June was to "maintain rates unchanged indefinitely."

Following Waller's speech on Friday, Marc Giannoni, Chief U.S. Economist at Barclays, and Jonathan Millar, Senior Economist, wrote in a report: “We expect a majority of FOMC members to align with Waller's stance and raise rates by 25 basis points in September, as the progress made on inflation is insufficient.”

These economists anticipate a "25 basis point increase in December, raising the target range of the federal funds rate to 4.00%-4.25%, as there has been almost no progress in year-on-year inflation for the remainder of this year.”

Jan Groen, Chief U.S. Economist at Societe Generale, stated in a report: “Persistent core inflation and the Federal Reserve's increasingly clear concerns about high inflation indicate that the threshold for maintaining rates unchanged is rising.”

Although Societe Generale expects the Federal Reserve to raise rates in March next year, Groen wrote in the report that the March rate hike "faces significant uncertainty and may not occur."

“Short End Says Rate Hike, Long End Remains Calm”: Market Turns Waller's Diagnosis Into Trades

After Waller's speech, the U.S. bond market quickly reacted, especially in the short end.

Reuters reported that the two-year U.S. Treasury yield briefly rose by 11 basis points to 4.34%, a one-month high; the 10-year yield rose by 5 basis points to 4.72%, while the 30-year yield saw significantly smaller increases.

This performance itself reflects the market's interpretation of Waller's speech: traders are raising the pricing for a near-term upward policy interest rate.

Michael Rosen noted that the drop in short-end U.S. Treasuries and the rise in long-end Treasuries reflect that the market is reassessing the Federal Reserve's policy direction—a Federal Reserve that views inflation as a primary concern indicates that short-term rates could still rise further.

Gunster from Fidelis Capital similarly pointed out that the rise in short-end yields and the decline in long-end yields are flattening the yield curve, which aligns with the market starting to bet on a Federal Reserve rate hike.

However, this market reaction does not mean that Wall Street has formed a consensus that there will definitely be a "rate hike in September."

Peter Cardillo, Chief Market Economist at Spartan Capital, believes that the Federal Reserve may not take action in September.

He stated that Waller has acknowledged the improvement in summer inflation data, but it is still "not convincing enough," so the Federal Reserve may prefer to observe September and October inflation data before deciding whether to act.

In other words, the market is re-pricing for a rate hike, but data remains the final threshold determining whether there will actually be a rate hike in September.

Waller Still Deliberately Rejects Forward Guidance: "Said a Lot But No Substance"

Not all institutions believe that Waller's speech has completed a "thorough repair" in policy communication.

Eugene Epstein, head of trading and structured products at Moneycorp, believes that although Waller's speech has a preliminary hawkish response, the substantive content remains limited.

His evaluation is very sharp:

“Waller said a lot, but these words seem to lack substantial content.”

Epstein noted that Waller has released similar hawkish signals before multiple FOMC meetings, but the subsequent policy actions did not follow through.

Therefore, he is concerned that the market may again experience a scenario of “being driven by hawkish rhetoric, only to find no real policy change.”

Jamie Cox, managing partner at Harris Financial Group, summed up this style as:

“Waller said a lot, but again said nothing.”

He believes Waller is trying to follow a middle path, both to reinforce anti-inflation credibility and to avoid binding future policy through forward guidance.

This is precisely where the metaphor of “providing a compass, not a GPS” is most fitting: Waller is willing to tell the market what kind of data will prompt the Federal Reserve to act but is unwilling to specify exactly which meeting will see action.

The Real Risk of "No Rate Hike in September": Not Policy Itself, But Credibility

Overall, assessments from Wall Street professionals indicate that the most noteworthy aspect of Waller's speech is not that he has committed to a September rate hike, but that he has reestablished a more hawkish policy logic:

If employment remains stable, the economy continues to show resilience, and core inflation does not fall quickly enough towards the 2% target, then current financial conditions may not be restrictive, and the Federal Reserve cannot rule out the possibility of further raising policy interest rates.

This is also why Amis believes that if there is no rate hike in September, it could potentially harm the Federal Reserve's credibility even more.

On the other hand, the views of Cardillo, Epstein, and others also remind the market: hawkish communication does not equal policy decisions.

Waller continues to adhere to the principle of "not providing forward guidance," without explicitly committing to a September rate hike or offering a mechanical policy reaction function.

Therefore, the current more accurate consensus forming on Wall Street may be:

Waller has completed a hawkish correction of the July communication through his Jackson Hole speech; the probability of a September rate hike has significantly increased, but whether there will actually be a rate hike depends on upcoming employment and inflation data.

For Waller, the true policy test has shifted from "does the market understand his speech" to a more direct question: if there is no significant improvement in data, is he willing to translate this hawkish diagnosis into an actual rate hike in September.

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