How does Wall Street view Wosh Jackson's debut in Jackson Hole? Hawkish "correction" on July communication, not raising interest rates in September may further damage the Federal Reserve's credibility

Author: Wall Street Journal

Federal Reserve Chairman Waller's debut at the Jackson Hole annual meeting on Friday was widely interpreted by 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 deemed restrictive, and that the recent better PCE and CPI data are insufficient to prove a substantial improvement in the underlying inflation trend. He bluntly stated that if he cannot be confident that inflation is falling at a "clear and sufficiently fast" pace, the Federal Reserve "still has work to do." Reuters reported that this was Waller's closest acknowledgment yet that rate hikes may be necessary.

Waller's remarks quickly shifted Wall Street's focus on the September FOMC meeting. Priya Misra, an investor at JPMorgan Asset Management, called it a "hawkish speech," believing Waller was strongly reaffirming the Fed's commitment to price stability and viewing it as a "cleanup" of the communication "misstep" from the July press conference. Aberdeen's investment director Matthew Amis warned that if the Fed does not raise rates in September, its credibility may be further damaged.

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

Institutions like Wells Fargo and Fidelis Capital believe Waller's speech has left enough room for a rate hike in the near term, but some institutions feel he still did not clearly outline the policy path for September.

Nick Timiraos, a journalist known as the "New Federal Reserve Correspondent," pointed out the crux of the debate: Waller believes financial conditions are not restrictive, and the recent improvement in inflation data has not convinced him that the underlying trend has seen "meaningful improvement," yet he still did not provide a specific policy path or clearly indicate support for a rate hike in September. Timiraos summarized Waller's speech as suggesting that the Fed may not yet be finished fighting inflation.

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

Hawkish Speech Restores Anti-Inflation Credibility

Waller's speech primarily accomplished a "correction" in policy communication.

Priya Misra from JPMorgan Asset Management was very direct in her assessment of Waller's speech:

"This is a hawkish speech."

She believes Waller was "strongly indicating" that policymakers are committed to price stability. Misra was more concerned about the relationship between Waller's speech and the communication following the July FOMC meeting. She referred to this speech as a strong response to what she considered a "communication failure" at the July press conference:

"This is a strong response to what I believe was poor communication at the July press conference."

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

This point was echoed by others in the industry.

Christopher Hodge, Chief U.S. Economist at Natixis, believes Waller's speech represents a "clear improvement" compared to the July press conference, where the market had underestimated the likelihood of Fed rate hikes, and the current pricing is now more reasonable.

Hodge believes Waller has strengthened his anti-inflation credibility by directly acknowledging the inflation issue, reaffirming the clear 2% target, and taking institutional responsibility for the Fed's stance on inflation.

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

Hackett pointed out that there was a previous misjudgment in the market, which thought the 2% inflation target might be softened, but Waller has now clearly told the market that this will not happen.

"He is reaffirming a hawkish stance in a more consistent, rather than suddenly escalating, manner."

Hackett even summarized it as:

Do not expect rate cuts in the near term; be prepared for rate hikes.

"New Federal Reserve Correspondent" Hits the Key Point: Financial Conditions Are Not Restrictive, Inflation Improvement Is Still Insufficient

Timiraos's summary of Waller's speech was more focused on the policy judgment itself.

He pointed out that Waller believes overall financial conditions are not restrictive, with the credit and loan markets showing almost no signs of significant constraints; at the same time, the recent better inflation data has not convinced Waller that the underlying trend has improved.

Waller's exact words were:

"I find it hard to describe overall financial conditions as restrictive."

Regarding the recent inflation data, Waller stated:

"While the PCE and CPI data this summer have been better than expected, that does not lead me to believe that the underlying trend has seen meaningful improvement."

Timiraos specifically highlighted this statement in his reporting and on social media.

In his view, this means the market cannot conclude that 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 concerned about is whether the underlying inflation trend is moving towards the 2% target at a sustained and sufficiently fast pace.

Waller Provides a Compass but Not a GPS

Another distinct feature of Waller's speech was that he clearly told the market his policy principles but refused to provide a specific policy reaction function.

Nathan Shetty, Chief Investment Officer at SEI Investments, believes Waller's clear reaffirmation of the 2% PCE target is firm, so 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 Fed's reaction function, leaving the market in a "black box" state.

Waller himself explained that excessive disclosure of the policy reaction function could, in turn, constrain the Fed, much like the over-reliance on forward guidance in 2021.

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

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

Investors want a GPS, but the Fed is providing a compass.

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

"If they do not raise rates in September, credibility will take another hit": Wall Street Begins to Rebet on Recent Action

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

Matthew Amis, investment director at Aberdeen, believes Waller's speech has set a critical scene for the September meeting:

"If they do not raise rates, credibility will take another hit."

This statement effectively links Waller's anti-inflation remarks with the September policy action: since Waller has clearly stated that the underlying inflation must fall at a sufficiently fast pace, otherwise the Fed "still has work to do," if future data does not show significant improvement and the Fed remains inactive in September, the market may question how much policy substance there is behind the Fed's previous hawkish statements.

Gary Schlossberg, global strategist at Wells Fargo Investment Institute, also believes that although Waller did not say it directly, "connecting all the dots" has effectively released a signal for at least one rate hike, or even more.

He stated that unless inflation falls significantly—which he does not expect to happen—the inflation pressures may even increase further in the next 6 to 8 months. Even if there is no rate hike in September, he believes the Fed is likely to take action earlier in the year.

Chris Gunster, head of fixed income at Fidelis Capital, explicitly stated that the market now believes the probability of a rate hike in September exceeds 50%.

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

Barclays and Société Générale Expect Rate Hikes in September and December This Year

Both Barclays and Société Générale expect the Fed to raise rates by 25 basis points at the September and December meetings.

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

After Waller's speech this Friday, Marc Giannoni, Chief U.S. Economist at Barclays, and Jonathan Millar, Senior Economist, wrote in a report: "We expect the majority of FOMC members to align with Waller's position and raise rates by 25 basis points in September, as the progress made on inflation is not sufficient."

These economists anticipate "another 25 basis point hike in December, raising the target range for 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 the year."

Jan Groen, Chief U.S. Economist at Société Générale, stated in a report: "Persistently stubborn core inflation and the Fed's increasingly clear concerns about high inflation indicate that the threshold for maintaining rates unchanged is rising."

Although Société Générale expects the Fed to also raise rates in March next year, Groen wrote in the report that the March hike "faces significant uncertainty and may not materialize."

"Short end says to raise rates, but long end remains calm": The Market Turns Waller's Diagnosis into Trades

After Waller's speech, the U.S. Treasury market reacted quickly, particularly at the short end.

Reuters reported that the two-year Treasury yield rose by as much as 11 basis points to 4.34%, reaching a one-month high; the 10-year yield rose by 5 basis points to 4.72%, while the increase in the 30-year yield was noticeably smaller.

This performance itself is an interpretation of the market's response to Waller's speech: Traders are raising their pricing for recent policy rate increases.

Michael Rosen believes that the decline in short-term Treasuries and the rise in long-term Treasuries reflect that the market is reassessing the Fed's policy direction—a Fed that views inflation as a primary issue suggests that short-term rates may still rise further.

Gunster from Fidelis Capital also pointed out that the rise in short-term yields and the decline in long-term yields have created a flattening yield curve, which aligns with the market beginning to bet on Fed rate hikes.

However, this market reaction does not mean Wall Street has formed a consensus that "a rate hike in September is a certainty."

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

He thinks Waller has acknowledged that summer inflation data has improved, but it is still "not convincing," so the Fed may want to observe inflation data in September and October 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 a rate hike will actually occur in September.

Waller Continues to Deliberately Reject Forward Guidance: "Said a Lot but with Little Substance"

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

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

His assessment is very sharp:

"Waller said a lot, but it seems there is not much substance to those words."

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

Therefore, he is concerned that the market may again experience a situation where it is "first driven by hawkish speeches, only to find no actual policy changes."

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

"Waller said a lot, but said nothing at all."

He believes Waller is trying to walk a middle path, reinforcing anti-inflation credibility while unwilling to bind future policy through forward guidance.

This is precisely where the metaphor of "providing a compass but not a GPS" is most appropriate: Waller is willing to tell the market what kind of data would prompt the Fed to act, but he is unwilling to tell the market which specific meeting will lead to action.

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

In summary of Wall Street's evaluations, the most noteworthy aspect of Waller's speech is not that he has promised the market a rate hike in September, but that he has reestablished a more hawkish policy logic:

If employment remains robust, the economy remains resilient, and underlying inflation does not fall quickly enough towards the 2% target, then current financial conditions may not be deemed restrictive, and the Fed cannot rule out the possibility of further increasing the policy rate.

This is also why Amis believes that if there is no rate hike in September, it may actually cause new damage to the Fed's credibility.

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

Waller still adheres to the principle of "not providing forward guidance," has not explicitly committed to a rate hike in September, and has not provided a mechanical policy reaction function.

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

Waller has completed a hawkish correction of the communication from July through his speech at Jackson Hole; the probability of a rate hike in September has clearly increased, but whether a rate hike will actually occur will still depend on the upcoming employment and inflation data.

For Waller, the real policy test has shifted from "whether the market understands his speech" to a more direct question: if the data does not show significant improvement, is he willing to translate this hawkish diagnosis into an actual rate hike in September.