Walsh's hawkish statement ignites expectations of austerity, Wall Street expects the Federal Reserve to raise interest rates by 25 basis points in September and December

The Zhitong Finance App learned that Federal Reserve Chairman Walsh released a clearly hawkish policy signal at the Jackson Hole Global Central Bank Annual Meeting on Friday, stressing that US inflationary pressure has not been clearly mitigated yet, and reiterated that the Fed must ensure that inflation falls “clearly and fast enough” to the 2% target. Analysts believe that this statement made the September meeting of the Federal Reserve an important turning point in monetary policy. If the upcoming inflation data continues to be high, the possibility that the Fed will raise interest rates again this year will increase markedly.

Walsh did not clearly state that the September rate hike has become an established decision, and some Federal Reserve officials still insist on waiting for more economic data before making a decision. However, his tough rhetoric about inflation has clearly changed market expectations.

In his speech, he said that the Federal Reserve's criteria for judging whether the policy needs to be further tightened are very clear, that is, it must have full confidence to confirm that potential inflation is falling back towards the 2% target, and that the downward trend must be clear enough and fast enough.

Economists and investors generally understand this statement as the Federal Reserve has opened the door for a possible rate hike at the September 15-16 policy meeting. According to federal funds futures pricing, after Walsh's speech, traders expect the probability that the Fed will raise interest rates in September to more than 50% from about 35% previously.

However, Walsh did not promise a specific time for the rate hike. James Clouse, an economist at the Andersen Institute and former deputy head of the Federal Reserve's monetary affairs department, said that it was reasonable for the market to interpret the speech as hawkish, but Walsh actually only emphasized that the Fed “still has work to do” and did not specify when to act.

Therefore, the US consumer price index (CPI) for August, which was announced on September 11, may be the key data to determine the direction of the September meeting. If inflation falls significantly lower than expected, calls for further policy tightening may cool down; conversely, if the CPI exceeds expectations again, it may further consolidate expectations for interest rate hikes in September.

Barclays and France: 25 basis points of interest rate hike in September, plus one more time in December

As Walsh unleashed a tougher inflationary stance, some Wall Street institutions have raised their expectations for further interest rate hikes by the Federal Reserve. Barclays and Société Générale believe that Walsh's speech raised the possibility that the Federal Reserve will raise interest rates by 25 basis points in September, and they expect to raise interest rates again by 25 basis points in December.

Evercore ISI also pointed out that the speech prompted it to raise expectations for interest rate hikes. This represents a clear shift from the previous judgment that recent inflation data is sufficient to support the Federal Reserve's continued interest rate unchanged.

Former Cleveland Federal Reserve Chairman Meister said that Walsh had actually proposed a set of “very persuasive reasons for raising interest rates.” She believes that the initiative for policy discussions has changed; in the future, instead, officials who advocate keeping interest rates unchanged are needed to come up with strong enough reasons.

Walsh: The current financial environment is not restrictive

In addition to emphasizing the risk of inflation, Walsh also made a clear judgment on the extent of current monetary policy restrictions. He said that there are no restrictions on the current financial environment. In other words, current interest rates may not be sufficient to exert sufficient downward pressure on economic activity and inflation.

He stressed that interest rates remain the Federal Reserve's “main tool” to achieve policy goals. This statement is more clear than his earlier assertion that the Federal Reserve has various policy tools.

At the same time, Walsh reiterated that the Federal Reserve will firmly push inflation back to the 2% target, and made it clear that this target is a fixed target measured by the Personal Consumption Expenditure (PCE) price index. This statement also clarified to a certain extent the concerns raised during his July press conference. At the time, some of Walsh's remarks about the inflation target made the market worried that the Federal Reserve might consider adjusting the 2% target.

Refusing to provide a clear interest rate path and insists on reducing forward-looking guidance

Although Walsh gave a more clear explanation of inflation and the policy framework this time around, he still refused to provide the market with a specific short-term interest rate path.

Walsh continues to defend his practice of reducing “forward-looking guidance.” He believes that during the financial crisis, forward-looking guidance may play a positive role, but in a normal environment, telling the market's future policy direction too clearly may mislead households and businesses.

He also rejected calls from the outside world asking him to directly explain his short-term policy expectations, stressing that financial markets should form their own judgments based on economic data.

Walsh said that the Federal Reserve's understanding of the operating mechanism of the economy is not accurate enough to mechanically provide a verified and always applied policy answer, and the key factors affecting monetary policy themselves will change over time.

Interest rate hikes may face political pressure before November midterm elections

If the Federal Reserve finally chooses to raise interest rates again in September or before the end of the year, political factors may also re-enter the market view.

US President Trump previously continued to demand lower financing costs, and Walsh was appointed by Trump. Trump has also criticized Walsh's predecessor many times before for not cutting interest rates fast enough.

Stephanie Roth, chief economist at Wolfe Research, believes that Walsh's speech provided a strong reason for the September rate hike, but considering the relationship between Walsh and the White House and potential political factors, she still judges the probability of the September rate hike to be slightly less than 50%.

Especially before the US holds midterm elections in November, if the Federal Reserve chooses to further raise interest rates, it may once again attract criticism from the White House.

IMF and Bank of England gave positive comments on Walsh's speech

Walsh's speech also received positive reviews from some of the world's leading policy makers.

Bank of England Governor Bailey said that Walsh put forward some very important views on the monetary policy framework, adding that this speech was “very substantial.”

International Monetary Fund (IMF) Managing Director Georgieva also said that Walsh clearly explained her views on the evolution of monetary policy in a rapidly changing environment, and also clearly expressed her commitment to maintaining price stability.

In particular, she pointed out that Walsh has made it clear that 2% is still the inflation target that the Federal Reserve needs to achieve.

The Federal Reserve's July policy meeting has shown that internal hawkish forces have increased. At the time, the Federal Reserve ultimately chose to keep interest rates unchanged, but not all officials supported this decision. Many officials advocated raising interest rates, while others believed that if inflation did not continue to fall, further tightening monetary policy would be a necessary choice.