Wall Street "considers" Wosh's speech: suggests that there will be further interest rate hikes, but the extent will not be too large
The Federal Reserve maintained interest rates on Wednesday, but Chairman Waller's wording was interpreted by the market as a clear signal that there will still be rate hikes later this year—albeit likely at a limited scale. This "not explicitly stated" communication strategy allowed Wall Street analysts and traders to interpret it differently, and market expectations regarding the policy path gradually became clearer.
On Wednesday (October 28), the Federal Reserve decided to keep the federal funds rate target range unchanged at 3.75% to 4% with a 10 to 2 voting result. The market immediately turned its attention to the December meeting, anticipating another rate hike in early 2027. In the press conference, Waller laid the groundwork with strong economic data, placing the reality of inflation remaining above the 2% target for nearly six years at the core of policy discussions, suggesting that the Fed's work is not yet complete.
Several economists believe that Waller's statement effectively paves the way for a rate hike in December while deliberately reserving policy flexibility for himself. Vincent Reinhart, Chief Economist at BNY Investments, summarized it as: "He is laying the groundwork for further tightening, but at the same time, he is setting boundaries—there is no need to tighten too much." Futures market pricing shows that investors currently expect the Fed to raise rates once in December and once in March next year.
### Market Interpretation: Hawkish Tone Less Than Expected, But Rate Hike Path Essentially Established
For some traders, Waller's hawkish stance was not strong enough. The two-year U.S. Treasury yield, which is more sensitive to Fed policy, fell by 4 basis points to 4.7%, while long-term yields rose slightly.
Nevertheless, several economists still maintain the judgment that the Fed will raise rates two more times, believing that this move is actually reversing the rate cuts implemented at the end of 2025 to stabilize a weak labor market.
"We still believe they will act in December," said Oscar Muñoz, Chief U.S. Macro Strategist at TD Securities USA, "I think the threshold for them to stop raising rates is very high."
Brett Ryan, Senior U.S. Economist at Deutsche Bank, pointed out that Waller's refusal to characterize current financial conditions as "tight" and his optimistic judgment on economic growth actually confirm the Fed's path of raising rates once more this year as predicted in September. "He conveyed a signal of further tightening without saying it outright," Ryan said.
### Strong Economic Data Provides Room for Rate Hikes
Waller opened the press conference by listing a series of economic highlights: GDP for the first half of the year was revised up to 2.4%, third-quarter growth tracking shows over 3%, business investment achieved double-digit growth, and initial jobless claims are near historical lows. He believes this inherent resilience provides ample room for the Federal Open Market Committee (FOMC) to focus on the inflation target.
Waller also cited the September rate hike decision as evidence of the Fed's willingness to act—that was the first rate hike in three years and was unanimously approved. He emphasized that there is an "information-rich window" between now and the December meeting, during which new growth and inflation data will be released, including data to be announced on Thursday.
"Bringing inflation down is our responsibility," Waller stated, "and that is why the FOMC has focused its discussions in recent days primarily on the duty of price stability."
### Deliberate Ambiguity: Not Stifling Growth, Nor Declaring Conditions Tight
In this speech, Waller deliberately maintained a balance between a hawkish stance and nurturing growth. He clearly stated that the Fed's goal is not to "throw sand in the gears of the economy and cause unemployment," and hinted at a desire to curb inflation without impacting business investment and employment.
When asked whether the demand brought about by artificial intelligence infrastructure construction is pushing up inflation, Waller emphasized the potential improvements in labor productivity and technological efficiency, stating:
"Economic growth is higher, but that does not mean that economic growth itself is creating inflation or making our job harder."
Regarding financial conditions, Waller acknowledged that credit conditions have tightened since the September rate hike but refused to declare that market conditions are tight enough to self-restrain growth. "Although overall financial conditions are tighter, I neither want to nor can characterize them as tight," he said. This statement was interpreted by the market as indicating that the Fed still needs to complete its tightening task through further rate hikes.
### Internal Disagreement: Two Votes Against, Hawkish Support for Delay Likely Due to Anticipation of December Rate Hike
The decision to maintain interest rates was not without controversy. Fed Governor Lisa Cook and Cleveland Fed President Beth Hammack voted against it, favoring an immediate rate hike.
Notably, the Dallas Fed President Lorie Logan and Minneapolis Fed President Neel Kashkari, who had previously issued warnings about high inflation, chose to side with the majority this time. Kathy Bostjancic, Chief Economist at Nationwide, believes:
Their support for the delay is likely because they anticipate the Fed will raise rates again in December.
Risk Warning and Disclaimer
The market carries risks, and investment should be approached with caution. This article does not constitute personal investment advice and does not take into account individual users' specific investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investing based on this is at one's own risk.