The market no longer believes in 'verbal anti-inflation' rhetoric, and U.S. Treasuries are forcing the Federal Reserve to show its hand. Analysts present two scenarios: one, the committee collectively pushes for a rate hike, with Wallsh falling in line; two, Wallsh temporarily holds off by leveraging his influence, but a rate hike will still be necessary down the road.
The U.S. Treasury market is sending a clear signal to Federal Reserve Chair Waller: tough rhetoric alone may not be sufficient to stabilize market expectations on inflation.
Since July, escalating tensions between the U.S. and Iran have driven international oil prices briefly above $100 per barrel, triggering a fresh wave of selling in the U.S. Treasury market. The yield on the 10-year U.S. Treasury note—the benchmark for global financial market pricing—has risen by more than 30 basis points since the end of June, reaching 4.678% as of last Friday, nearing its highest level in nearly a decade. Bond prices move inversely to yields, so rising yields indicate that the market is demanding higher risk compensation.
“The market is sending a message to the Fed that uncertainty is building, and investors want to be better compensated,” said Paul Christopher, Managing Director and Global Investment Strategist at Wells Fargo & Co’s Investment Institute.
At the heart of market concerns is the fear that higher oil prices could reignite inflation, while the Federal Reserve under Chair Waller is offering less clarity about its future policy path. Unlike former Chair Powell, who used forward guidance to anchor market expectations, Waller prefers to let incoming economic data dictate the policy direction.
As of last Friday, CME Group’s FedWatch Tool indicated a roughly 62% probability that the Federal Reserve would hold rates steady at its July meeting, but the likelihood of a rate hike had risen to 38%, significantly higher than the approximately 13% recorded a week earlier.
“This shows the market is deeply concerned about inflation and is watching closely to see whether the Fed will back up its anti-inflation stance with concrete action,” said Gennadiy Goldberg, U.S. Head of Rates Strategy at TD Securities.
The Federal Reserve will announce its latest interest rate decision at 02:00 Beijing time on July 30, followed by a monetary policy press conference by Fed Chair Waller at 02:30. With fewer than four days remaining until the Federal Reserve's policy meeting, markets are facing an unusually high degree of uncertainty regarding the central bank’s next move—a level of ambiguity not seen in years. This very 'uncertainty' reflects the policy shift being driven by newly appointed Fed Chair Waller.
“We are seeing the imprint of the new chair reflected in market prices,” said Narayana Kocherlakota, former president of the Federal Reserve Bank of Minneapolis and current professor of economics at the University of Rochester.
He believes Waller aims to establish a new Fed model: one in which markets no longer know in advance what action the central bank will take, allowing the Fed the flexibility to either hold rates steady or raise them based on the latest data. This shift has also led markets to pay closer attention to the individual stances of different Fed officials.
Jim Bianco, President and Chief Macro Strategist at Bianco Research, noted that investors now need to monitor the views of all 12 voting members of the Federal Open Market Committee (FOMC), rather than relying solely on the chair’s statements. “Waller is no longer the sole driver; the Fed has 12 independent voters, and the chair is just one among them,” Bianco said.
The divide between hawks and doves is widening.
Some Federal Reserve officials have clearly expressed their desire for further policy tightening. Dallas Fed President Logan and Cleveland Fed President Mester have emphasized in recent months that the Fed needs to consider raising interest rates to ensure inflation continues to decline.
However, another group of officials believes the Fed can wait for more data. New York Fed President Williams argues that policymakers can monitor how inflation evolves before deciding whether to adjust rates.
“Watching the Fed now has become a vote-counting exercise—you need to understand where every voter stands,” Bianco said.
He believes that roughly five votes within the Fed currently support a rate hike, still short of the seven-vote majority needed.
However, Neil Dutta, Head of Economic Research at Renaissance Macro Research, noted that although officials favoring a rate hike are not in the majority, they are 'very resolute' and could sway some undecided members toward a tighter stance.
Derek Tang, co-founder of LH Meyer/Monetary Policy Analytics, said this meeting could mark the first time under Chair Waller that clear divisions have emerged within the Fed. The June meeting chaired by Waller saw no dissenting votes, partly because other officials granted the new chair a 'honeymoon period,' but that may not last.
Whether Waller supports a rate hike remains the biggest uncertainty.
The key question now is how Waller himself views the interest rate path. Since becoming Fed chair, Waller has not clearly articulated his views on the economy, inflation, or the likely trajectory of interest rates.
Gregory Daco, Chief Economist at EY-Parthenon, said Waller’s remarks during his congressional testimony were “at best, guarded,” offering no clear indication of whether he believes inflation will continue to ease or whether AI-related investment could exert upward pressure on inflation.
‘These are all questions the Fed chair should address, but Worshe seems to rely, to some extent, on collective decision-making by the committee,’ Daco said.
Bianco believes that if Worshe ultimately supports a rate hike, the voting outcome of the Federal Reserve’s interest rate committee could reach 10 to 2.
However, Dutt thinks Worshe might also push the committee to hold rates steady in July. Strategically speaking, though, if internal committee pressure forces a rate hike in the coming months, Worshe may prefer to act sooner.
Meanwhile, some economists believe Worshe is not inclined toward an immediate rate hike. They note that during his previous campaign for Fed chair, Worshe showed a dovish leaning, and the U.S. government had consistently pressured the Fed to lower interest rates.
In a recent interview, U.S. President Trump also acknowledged that the Fed chair holds only one vote on the committee. ‘I have great respect for him, but don’t forget—he has a committee,’ Trump said.
Tim Duy, chief U.S. economist at SGH Macro Advisors, believes this statement effectively weakens Worshe’s influence as chair, as markets will pay closer attention to the balance of power within the committee.
Worshe Needs to Secure Committee Support
Another challenge facing Worshe is that he will not automatically receive support from other Fed officials.
Kocherlakota noted that historically, Fed chairs have typically been able to build consensus within the committee, but that does not mean other members unconditionally back the chair.
‘The Fed chair doesn’t automatically get seven votes just by sitting in that seat—he must persuade his colleagues that a given policy serves the economy’s best interests,’ he said.
Kocherlakota, who served alongside Warsh as a Federal Reserve official from 2009 to 2010, stated that Warsh possesses exceptional analytical skills but needs to translate his personal judgment into policy arguments capable of influencing the committee.
Currently, former Fed Chair Powell remains on the Federal Reserve Board, further adding uncertainty to policy discussions.
Bianco noted that if significant divisions emerge within the Federal Reserve, Powell could become a pivotal voter.
Kocherlakota believes that given the recent moderation in inflation data, the Fed still has grounds to hold rates steady in July. However, over the next two to three meetings, the Fed may still need to raise rates to uphold its credibility on inflation control and maintain policy independence.
For Warsh, the real challenge is approaching: how to build sufficient influence to steer an increasingly divided Federal Reserve toward its next policy path while reducing forward guidance to markets.
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