Morgan Stanley: The Fed's Warsh and Waller Communication Paradox Leads to Divergence in the Hiking Path

According to Bank of America Securities’ research report dated September 4, 2026, Federal Reserve Chair Warsh’s hawkish speech at Jackson Hole and Governor Waller’s dovish remarks created a communication paradox. Warsh invoked the analogy of “Cohen Day versus Bernanke Day” to suggest that the path of rate hikes could shift toward the more aggressive Cohen trajectory, offering additional directional guidance to restore credibility damaged in July; Waller, by contrast, freely described a state-dependent policy rule. Bank of America believes that the clearer the rule is explained, the less market guidance is needed—greater transparency implies fewer commitments. Bank of America expects the European Central Bank to conclude its tightening cycle after a 25-basis-point rate hike in September, with rate cuts beginning in 2027. The UK’s 2026 growth forecast has been raised to 1.2%, but risks of rate hikes at the November, December, and February meetings remain due to energy shocks. U.S. Treasury debt has surpassed $40 trillion, with interest payments now exceeding those for defense and healthcare; the debt feedback loop is a slow, cumulative process. The Philippines’ 2026 fiscal deficit may widen to 6.1% of GDP, the Czech Republic may raise rates one more time, and Poland will hold rates steady. Divergence across global economies is the dominant theme.