Deutsche Bank and Nomura interpret Waller's speech: Hawkish shift becomes clear, Fed's September rate hike window opens

According to Zhihui Finance APP, Federal Reserve Chairman Kevin Walsh took an unexpectedly hawkish stance in his speech at the Jackson Hole meeting, intensifying market expectations for a rate hike next month.

On Monday, spot gold declined and Asian stock markets fell. According to CME’s FedWatch tool, federal funds futures traders now see a 60.4% probability of a 25-basis-point rate hike in September, up from about 56% on Friday.

Below are market observers’ comments on Walsh’s speech:

Unexpectedly Hawkish Interpretation

Deutsche Bank stated: “Chairman Walsh’s speech at the Jackson Hole meeting, his clarity on the economic outlook, and his distinctively hawkish stance took us by surprise.” The institution continues to expect the Federal Reserve to raise rates by 50 basis points this year, with one hike each at the Federal Open Market Committee (FOMC) meetings in September and December.

UOB said in a report: “The emphasis on inflation risks, combined with Walsh’s clear commitment to achieving price stability and his reluctance to pre-commit to future policy actions, further heightens the high risk of policy tightening this year, although this could also be just verbal intervention without actual action.”

Focus on Recent Data

Nomura stated in a report: “Markets are highly sensitive to recent inflation data. Walsh made hawkish remarks at the Jackson Hole Economic Symposium, highlighting the importance of the inflation target and hinting that if the disinflation process is not fast enough, policy may need to respond.”

Strengthening Independence

Tiger Brokers market strategist James Ooi said Walsh’s assessment of strong U.S. economic performance “is seen as reducing the justification for a rate cut in the near term.” His “emphasis on the 2% inflation target can be interpreted as an effort to reinforce the Federal Reserve’s independence and credibility, assuring markets that monetary policy won’t yield to fiscal pressures.”

Skeptical of Rate Hikes

However, Miller Tabak + Co. chief market strategist Matthew Maley argued, “There is still little historical precedent for these rate hikes.”

Maley said: “Walsh seems to be overstating inflation in order to take credit when overall inflation metrics inevitably fall.” He added that since the last FOMC meeting, labor market data has been weak, while inflation data has been better than expected.

Differences Between the Federal Reserve and Treasury

Gecal Research stated in a report that Walsh reiterated that short-term rates should continue to serve as the main tool for monetary policy, meaning he will continue to shorten the average duration of the Federal Reserve balance sheet.

Gecal added: “This seems to put the Federal Reserve at odds with the U.S. Treasury, which announced earlier in August that it would increase buybacks of long-term Treasuries, clearly to prevent further rises in long-term yields.”

Bearish for Gold

Research firm Susquehanna noted: “Walsh’s commitment to bringing inflation back to the 2% target and his suggestion that rates could rise further has boosted the U.S. dollar and partly reversed previous currency depreciation trades that had pushed gold prices higher—gold surged about 14% in August, marking the strongest single-month gain this century.”