Wall Street Views Wash's Jackson Hole Debut as a Hawkish 'Correction' of July Communication

Author: Wall Street Journal

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

Wash's speech clearly reaffirmed that the Fed's 2% inflation target is non-negotiable, stated that current overall financial conditions are hardly restrictive, and noted that recent stronger PCE and CPI data are insufficient to prove a material improvement in the underlying inflation trend. He bluntly stated that if the Fed cannot be confident that inflation is falling at a "clear and sufficient" pace, it "has more work to do." Reuters reported that this was Wash's closest indication yet that a rate hike may be necessary.

Wash's remarks quickly shifted Wall Street's focus regarding the September FOMC meeting. Priya Misra, an investment professional at J.P. Morgan Asset Management, directly called it an "hawkish speech," arguing that Wash 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; Matthew Amis, Investment Director at Aberdeen, warned that if the Fed does not raise rates in September, its credibility could be further undermined.

Barclays and Société Générale both adjusted their forecasts for Fed policy based on Walsh’s speech at the Jackson Hole symposium, expecting the Fed to raise rates by 25 basis points at both its September and December meetings. Société Générale also anticipates an additional rate hike in March.

Institutions such as Wells Fargo and Fidelis Capital believe that Walsh's remarks have left sufficient room for near-term rate hikes, but some institutions argue that he still has not clearly outlined a policy path for September action.

Nick Timiraos, a journalist known as the "New Fed Whisperer," pinpointed the core of this debate: Walsh believes financial conditions are not restrictive, and recent improvements in inflation data have not convinced him that the underlying trend has seen "meaningful improvement." However, he has not outlined a specific policy path or clearly indicated whether he supports a September rate hike. Timiraos summarized Walsh’s remarks as suggesting that the Fed may not yet be done fighting inflation.

Thus, the market faces a more hawkish policy outlook, yet still lacks a clear "reaction function." CME data shows that after Waugh's speech, the probability of a September rate hike rose from approximately 35% before the speech to about 50%; other market data briefly indicated the probability climbed further to around 60%.

Wash's speech first accomplished a correction at the level of policy communication.

JPMorgan Asset Management's Priya Misra offered a straightforward assessment of Wash's remarks:

This is a hawkish speech.

She believes Wash is “strongly signaling” policymakers’ commitment to price stability. Misra is more focused on the connection between Wash’s recent remarks and the communication following the July FOMC meeting. She characterized the remarks as a strong response to the “communication misstep” during the July press conference:

This is a strong response to the poor communication I believed occurred during the July press briefing.

She even referred to it as a "clean-up act," a corrective follow-up to the July communication.

This point has also been echoed by individuals from other institutions.

Natixis Chief U.S. Economist Christopher Hodge believes that Wash’s recent remarks represent a “clear improvement” compared to the July press conference, as the market had previously underestimated the likelihood of Fed rate hikes, and current pricing is now more reasonable.

Hodge believes that Wash strengthened his credibility in fighting inflation by directly acknowledging the inflation issue, reaffirming a clear 2% target, and taking institutional responsibility for the Fed’s role in addressing inflation.

Nationwide’s chief market strategist, Mark Hackett, believes that Powell successfully achieved his goal: conveying his position to the market without causing noticeable disruption.

Hackett noted that the market had previously misjudged that the 2% inflation target might be softened, but Walsh has now clearly informed the market that this will not happen.

He is reiterating his hawkish stance in a more consistent, rather than abrupt, manner.

Hackett even summarized it as:

Don’t expect rate cuts in the near term; prepare for rate hikes.

Timiraos's summary of Wash's remarks focused more on the policy judgment itself.

He noted that Wash believes overall financial conditions are not restrictive, with little evidence of significant constraints in credit and loan markets; however, recent stronger inflation data has not convinced Wash that the underlying trend has improved.

Wash's exact words were:

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

Regarding the recent inflation data, Wash said:

Although this summer's PCE and CPI data came in better than expected, it does not lead me to believe that the underlying trend has seen meaningful improvement.

Timiraos highlighted this statement in both reporting and on social media.

In his view, this means the market cannot assume that Walsh has shifted to a more accommodative policy stance simply because inflation data over the past few months have come in better than expected. Walsh is truly focused on whether underlying inflation trends are moving persistently and sufficiently quickly toward the 2% target.

Another distinctive feature of Wash's speech was that he clearly articulated his policy principles but refused to provide a specific policy reaction function.

SEI Investments' Chief Investment Officer, Nathan Shetty, believes that Walsh's clear reiteration of the 2% PCE target as firm makes the speech interpretable only as more hawkish.

However, Ellen Hazen, Chief Market Strategist at F.L. Putnam Investment Management, noted that Walsh did not disclose the Fed’s reaction function, leaving the market still in a “black box.”

Wash himself explained that overly disclosing the policy reaction function could constrain the Fed, similar to how excessive reliance on forward guidance in 2021 did.

Hazen believes this means Wash wants the Federal Reserve to maintain greater flexibility in response to economic changes, but the market may not favor this approach.

Andersen Capital founder Peter Andersen used a vivid analogy:

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

In his view, investors expected Wash to provide detailed explanations of the economic outlook and policy path, but Wash was actually telling the market: the new Federal Reserve will not offer as much forward guidance as previous chairmen did—market participants must adapt to this “new regime.”

The most important development for the market remains the resurgence of a September rate hike from a peripheral scenario to a central topic of discussion.

Aberdeen's Investment Director, Matthew Amis, believes that Wash's remarks set a crucial stage for the September meeting:

If they don’t raise rates, their credibility will take another hit.

This statement actually links Wash’s stance on inflation to the September policy action: since Wash has clearly stated that core inflation must fall fast enough, or else the Fed “has more work to do,” if future data shows no significant improvement and the Fed holds steady in September, the market may question how much substance there really is behind the Fed’s previous hawkish signals.

Gary Schlossberg, Global Strategist at Wells Fargo Investment Institute, also believes that, although Wash did not explicitly state it, "connecting the dots" has effectively signaled at least one rate hike, and possibly more.

He stated that, unless inflation shows a clear decline—which he does not expect—inflationary pressures could intensify further over the next six to eight months. Even if there is no rate hike in September, he believes the Fed is highly likely to act earlier this year.

Fidelis Capital's Fixed Income Head, Chris Gunster, explicitly stated that the market now considers the probability of a September rate hike to be over 50%.

He believes that the factors Wash mentioned—ongoing inflation above target, a resilient labor market, and economic strength—collectively provide the Federal Reserve with room to raise interest rates in the near term.

Barclays and Société Générale both expect the Federal Reserve to raise interest rates by 25 basis points at its meetings in September and December.

Barclays' prediction in mid-June this year was to maintain interest rates unchanged indefinitely.

Following Wash's remarks this Friday, Barclays' Chief U.S. Economist Marc Giannoni and Senior Economist Jonathan Millar wrote in their report: "We expect a majority of FOMC members to align with Wash's position and raise rates by 25 basis points in September, citing insufficient progress on inflation."

These economists expect another 25-basis-point rate hike in December, raising the federal funds rate target range to 4.00%-4.25%, as inflation has shown almost no year-over-year progress for the remainder of the year.

Jan Groen, Chief U.S. Economist at Société Générale, stated in the report: "Persistent stubborn core inflation and the Fed's growing concern about high inflation suggest that the threshold for holding rates steady is rising."

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

Following Wash's remarks, the U.S. Treasury market reacted swiftly, with the short end showing particularly strong movement.

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

This behavior itself reflects the market's interpretation of Walsh's remarks: traders are increasing their pricing in for near-term policy rate hikes.

Michael Rosen believes that the decline in short-term U.S. Treasuries and the rise in long-term U.S. Treasuries reflect the market’s reassessment of the Fed’s policy direction—a Fed that views inflation as the primary concern implies that short-term interest rates may still rise further.

Gunster from Fidelis Capital also noted that the rise in short-term yields alongside a decline in long-term yields has led to a flattening yield curve, consistent with market expectations of Fed rate hikes.

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

Spartan Capital's chief market economist, Peter Cardillo, believes the Federal Reserve may not act in September.

He believes that the Fed has acknowledged that summer inflation data has improved, but still finds it "not sufficiently convincing," so the Fed may want to observe the September and October inflation data before deciding whether to act.

In other words, the market is repricing expectations for a rate hike, but the data remains the final hurdle for an actual September rate increase.

Not all institutions believe that Wash's speech has fully repaired the policy communication.

Eugene Epstein, Head of Trading and Structured Products at Moneycorp, believes that while Wash’s remarks initially elicited a hawkish reaction, the substance remains limited.

His evaluation was very sharp:

Wash said a lot, but these words seem to have little substance.

Epstein believes that Wash had previously signaled similar hawkish sentiments ahead of multiple FOMC meetings, but the actual policy actions did not follow through.

Therefore, he is concerned that the market may again experience a scenario where it first reacts to hawkish remarks, only to later realize there are no actual policy changes.

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

Wash said a lot, but said nothing at all.

He believes that Walsh attempted to take a middle path, aiming to reassert credibility on inflation control while being unwilling to tie future policy decisions through forward guidance.

This is precisely where the metaphor “give a compass, not a GPS” fits best: Wash is willing to tell the market what data would prompt the Fed to act, but not which specific meeting it will act at.

According to Wall Street insiders, the most noteworthy aspect of Walsh’s speech was not his commitment to a September rate hike, but his reestablishment of a more hawkish policy framework:

If employment remains strong, the economy stays resilient, and underlying inflation does not return to 2% quickly enough, current financial conditions may not be restrictive, and the Fed cannot rule out further increases in the policy rate.

This is why Amis believes that not raising rates in September could instead inflict new damage on the Fed's credibility.

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

Wash still adheres to the principle of "not providing forward guidance," making no explicit commitment to a September rate hike or offering a mechanical policy reaction function.

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

Wash has already completed the hawkish revision of July's communication through the Jackson Hole speech; the probability of a rate hike in September has significantly increased, but whether a hike ultimately occurs will still depend on upcoming employment and inflation data.

For Walsh, the true policy test has shifted from whether the market understood his message to a more direct question: if the data shows no clear improvement, is he willing to turn this hawkish diagnosis into an actual rate hike in September?