The hawkish stance of Waller ignites tightening expectations, as Wall Street anticipates the Federal Reserve to raise rates by 25 basis points in September and December.

Federal Reserve Chairman Waller sent a clear hawkish policy signal at the Jackson Hole Global Central Bank Symposium on Friday, emphasizing that inflationary pressures in the U.S. have not yet shown sufficient signs of relief. He reiterated that the Federal Reserve must ensure inflation returns to the 2% target at a "clear and sufficiently fast" pace. Analysts believe this statement makes the Fed's September meeting a critical turning point in monetary policy. If the upcoming inflation data continues to be high, the likelihood of the Fed raising interest rates again this year will rise significantly. Waller did not explicitly state that a rate hike in September has become a foregone conclusion; some Fed officials still advocate waiting for more economic data before making a judgment. However, his tough language on inflation has clearly altered market expectations. In his speech, he noted that the criteria for assessing whether policy needs to be further tightened is very clear: there must be sufficient confidence that underlying inflation is trending back towards the 2% target, and that the downward trend must be both clear enough and fast enough. Economists and investors generally interpreted these comments as the Fed having opened the door for a possible rate hike at the policy meeting scheduled for September 15-16. Following Waller's remarks, traders raised their expectations for a September rate increase probability from around 35% to over 50%, according to federal funds futures pricing. However, Waller did not commit to a specific timeline for hiking rates. James Clouse, an economist at the Andersen Institute and former deputy director of the Fed's Monetary Affairs Division, stated that it is reasonable for the market to interpret the speech as hawkish, but Waller essentially only emphasized that the Fed "still has work to do," without clearly indicating when it would take action. Therefore, the U.S. Consumer Price Index (CPI) for August, scheduled to be released on September 11, may become a key data point in determining the direction of the September meeting. If inflation is significantly lower than expected, calls for further tightening of policy may cool; conversely, if the CPI exceeds expectations again, it could further solidify expectations for a rate hike in September. Barclays and Societe Generale: September may see a 25 basis point rate hike, with another in December As Waller signaled a tougher stance on inflation, some Wall Street firms have already raised their expectations for further rate hikes from the Fed. Barclays and France's Industrial Bank believe Waller's remarks have increased the likelihood of a 25 basis point hike in September, and they anticipate a further 25 basis point hike in December. Evercore ISI also noted that this speech prompted them to raise their rate hike expectations, indicating a significant shift from their previous view that recent inflation data was sufficient for the Fed to maintain its current interest rates. Former Cleveland Fed President Mester stated that Waller has presented a "very compelling case for a rate hike." She believes that the initiative in policy discussions has shifted, and that those advocating for maintaining rates must now provide sufficiently strong reasons for their position. Waller: The current financial environment is not restrictive In addition to emphasizing inflation risks, Waller also made a clear judgment about the degree of restrictiveness in current monetary policy. He indicated that the current financial environment is not restrictive. In other words, the current level of interest rates may still be insufficient to exert significant downward pressure on economic activity and inflation. He emphasized that interest rates remain the "primary tool" for the Fed to achieve its policy goals. This statement is somewhat clearer than his previous emphasis on the Fed having a variety of policy tools. Waller also reiterated the Fed's firm commitment to bringing inflation back to the 2% target, specifying that this target is measured against the personal consumption expenditures (PCE) price index. This clarification also addresses concerns raised by his comments during a July press conference, when some market participants worried that the Fed might consider adjusting its 2% inflation target. Refusing to provide a clear interest rate path, he insists on reducing forward guidance Despite his clearer explanations regarding inflation and the policy framework, Waller still refused to provide the market with a specific short-term interest rate path. Waller defended his approach of reducing "forward guidance." He believes that while forward guidance can play a positive role during a financial crisis, over-clarifying future policy directions in normal environments could mislead households and businesses. He also rejected calls to directly outline his short-term policy expectations, emphasizing that financial markets should form their own judgments based on economic data. Waller indicated that the Fed's understanding of the economic operating mechanisms is not precise enough to provide a mechanical, verified, and universally applicable policy answer, and key factors influencing monetary policy may change over time. Rate hikes before the midterm elections may face political pressure If the Fed ultimately chooses to raise rates again in September or before the end of the year, political factors may re-enter the market's perspective. U.S. President Trump has previously called for lower borrowing costs, and Waller was appointed by Trump. Trump has also criticized Wallers predecessor for not cutting rates quickly enough. Stephanie Roth, chief economist at Wolfe Research, believes that Waller's speech provides a strong rationale for a September rate hike, but given Waller's relationship with the White House and potential political factors, she currently assesses the probability of a September rate hike to be slightly below 50%. Especially before the midterm elections in November, if the Fed chooses to further raise rates, it may again provoke criticism from the White House. IMF and Bank of England positively evaluate Waller's speech Waller's remarks also received positive feedback from some major policymakers globally. Bank of England Governor Bailey stated that Waller raised some very important points about the monetary policy framework and described the speech as "very substantive." Kristalina Georgieva, managing director of the International Monetary Fund (IMF), said that Waller clearly articulated his views on the evolution of monetary policy in a rapidly changing environment while affirming the commitment to maintaining price stability. She specifically pointed out that Waller has clearly stated that 2% remains the inflation target the Fed needs to achieve. The Fed's July policy meeting already indicated a strengthening of hawkish forces within. At that time, the Fed ultimately chose to maintain interest rates, but not all officials supported this decision. Several officials advocated for a rate hike, while others believed that if inflation does not continue to decline, further tightening of monetary policy will become a necessary choice.