Report: If inflation data is strong in the coming weeks, Waller will be ready to raise interest rates in September

Author: Bu Shuqing, Wall Street Watch

According to a report by the Financial Times on Thursday, if inflation data is hot in the coming weeks and market expectations for interest rate hikes increase, Federal Reserve Chairman 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 in U.S. Treasuries following last week's meeting, Waller insists on maintaining a streamlined communication strategy.

The report states that those familiar with Waller's thoughts say he acknowledges missteps in communication since taking office as Fed Chairman, including failing to adequately reinforce the core message regarding price stability and causing market confusion over whether long-term reform plans would affect recent monetary policy. However, these individuals insist that these missteps are not enough to overturn the overall direction of reform.

After last week's Federal Reserve 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 curbing inflation, while inflationary pressures triggered by Trump's war on Iran have further exacerbated market uncertainty regarding interest rate prospects.

Sticking to Streamlined Communication, Not Yielding to Market Pressure

Since Waller took office as Federal Reserve Chairman in May of this year, the 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 to the market, while Waller has taken the opposite approach.

Since leaving the Federal Reserve in 2011, Waller has publicly criticized "forward guidance" multiple times, believing that this practice has trapped successive chairmen in their own words and led to excessive policy commitments.

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

Waller has publicly stated that the "trigger pullers" who truly make investment decisions in the bond market understand his approach, and the 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 comes from."

September Rate Hike Probability Rises to 55%, Interest 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 about 55%.

Informed sources indicate that although Waller has proposed the possibility of reducing the Fed's $6.7 trillion balance sheet to tighten monetary policy, interest 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 average inflation of about 2.4% over the next five years (starting five years from now), which has recently declined. Informed sources believe this indicates that the market still believes the Fed is committed to achieving its price stability goal.

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 too little flexibility for central banks." However, he also pointed out that Waller could do more in explaining the plan to reduce inflation.

Jackson Hole Speech May Become a Key Turning Point

Informed 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 what he believes are shortcomings in his information dissemination.

Eric Wallerstein expects, "This speech will present 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 hopes to confront all of this and attempt to correct the course."