Rifts within the Federal Reserve are becoming apparent. Will Waller's speech set the tone for the policy path?

On Thursday local time, Federal Reserve officials continued to send mixed signals regarding the inflation outlook: some decision-makers believe further rate hikes are needed to curb prices, while others adopt a more cautious stance. This divergence coincides with Federal Reserve Chair Kevin Walshs scheduled keynote speech on Friday morning local time at the annual central bank symposium in Jackson Hole, Wyoming. The internal divisions within the Federal Reserve are evident: hawks advocate for continued rate increases, while some decision-makers tend to wait. Kansas City Fed President Jeff Schneider noted that the Fed's interest rate policy has not suppressed the U.S. economy. Cleveland Fed President Beth Harmack shares the same view; she was one of the officials who opposed the Fed's decision to keep rates unchanged last month. They clearly suggest that to bring inflation back to the 2% target in a reasonable time frame, interest rates should be raised. Schneider stated in an interview, To me, short-term rates might still be relatively accommodative. So we have a lot of work to do. Harmack expressed a similar opinion, stating that the current interest rates do not sufficiently restrain the economy to allow price pressures to cool off on their own. Harmack commented: We should take some restrictive measures to help bring inflation back to target levels. The longer inflation stays above target, the harder it will be to bring it down. Other Fed officials, however, are taking a more cautious approach. Boston Fed President Susan Collins believes there is still evidence that the Fed's current policy has at least some degree of economic restraint and helps to slow inflation. Collins stated, I still feel that the interest rates are slightly restrictive. Chicago Fed President Austin Goolsbee said he is still assessing the inflation outlook. I need evidence that this round of inflationary pressure will not persist. I can wait for this evidence, he remarked. But if the data starts to rebound, especially regarding the services sector for example, if inflation rates remain high, in the wrong direction, or if progress stalls then I will start to feel anxious. This divergence indicates that there is still no consensus within the Fed on the path for interest rates, and the market is watching to see if Walsh's speech on Friday will provide clearer directional signals. A Split Among Economists It is not just the Federal Reserve that is divided; economists are also at odds regarding the necessity of rate hikes in the coming months to contain inflation. Notably, U.S. inflation has remained above the Fed's 2% target for 65 consecutive months. The latest price data released on Wednesday shows that the Feds preferred inflation gauge the core Personal Consumption Expenditures Price Index (PCE) rose 3.7% year-on-year in July, unchanged from June, while analysts had expected a rise of 3.6%. Morgan Stanley Wealth Management Chief Economic Strategist Ellen Zentner stated following the release of the July PCE data that the mild unexpected upturn in inflation data and relatively strong economic performance are not favorable for investors or the Fed, but this data is still not enough to shift the decision balance for the September FOMC meeting, making a pause in rate hikes in September still highly likely. She also mentioned that if subsequent data continues to show the current sticky inflation trend, the Fed may feel more pressure to take action. Arianna Curtis, a senior economist at Capital Economics, believes that the July PCE data is not sufficient to drive the Fed to raise rates in September. However, she emphasized that the core PCE year-on-year remains high at 3.3%, significantly above the Feds 2% target, combined with resilient economic growth and a relatively strong labor market, suggesting substantial resistance to a decline in inflation. Therefore, she explicitly warned: Its only a matter of time before rate hikes occur, and I expect a 25 basis point increase in December, followed by another hike early next year. Jan Hatzius, chief economist at Goldman Sachs, stated earlier this month that the market's pricing for further Fed rate hikes is still too hawkish, making the prospect of a rate hike in September very unlikely. Goldman Sachs still maintains the baseline scenario that the Fed will hold rates steady until the end of 2026. According to federal funds futures data, investors currently estimate the likelihood of a rate hike in September at about 36%. Walshs Reform Proposal Gains Initial Support: FOMC Meetings May Be Reduced to Six Per Year Additionally, both Schneider and Goolsbee expressed openness to a reform proposal put forward by Walsh to reduce the number of Federal Open Market Committee (FOMC) policy meetings from eight to six per year. Walsh has solicited feedback on this proposal from the committee. Goolsbee described the proposal as worthy of consideration and suggested it should be discussed. Schneider indicated that the emergence of new technologies means policymakers may more quickly grasp economic conditions; if information is obtained more promptly, fewer meetings could actually make us more efficient. But this information must be more timely than it is now. Walsh will deliver his speech at 10 a.m. New York time on Friday. Reports suggest that since taking office, Walsh has adopted a speak less, listen more communication style, emphasizing reducing forward guidance and allowing the market to rely more on hard data than on officials' statements to gauge policy direction. This strategy grants the Fed greater policy flexibility but also leaves investors continually puzzled about the interest rate outlook. The market is keenly awaiting how Walsh articulates his views on the economy, inflation, and the interest rate outlook at the Jackson Hole conference, and whether he will signal a new policy path. Apollo Global Management expects that during Walsh's speech in Jackson Hole on Friday, he will present an hawkish economic outlook to aim at controlling long-term yields. Walshs assertion that forward guidance is not a good idea is completely correct, remarked Apollos chief economist Torsten Slok. But most people also agree that framework guidance is a good idea, and now we need some framework guidance from him. Analysts at TMX warned that it is unlikely Walsh will completely change his communication strategy, which raises a high risk of market disappointment.