What is Walsh Thinking? Will Rates Rise in September? Markets to Grapple with Uncertainty Ahead of August Fed Jackson Hole Symposium

Federal Reserve Chair Walsh’s first press conference released policy signals of "clear goals, ambiguous path." As the August Jackson Hole symposium approaches, the market will closely watch how Walsh defines the Fed’s reaction function and whether there is a risk of unexpected rate hikes at the September meeting.

Morgan Stanley’s latest report suggests that Walsh is intentionally changing the way the Fed communicates with the market. He clearly conveyed three signals: current inflation remains elevated, the policy goal is to bring inflation back to target levels, and he maintains confidence in achieving this goal. However, he consistently avoided the question most concerning to the market—what specific path the Fed will take to achieve this goal.

This means that the core of market speculation in the coming weeks will revolve around one question: If tightening financial conditions remain insufficient to curb inflation, will Walsh choose to actively strengthen policy tightening? The Jackson Hole symposium may become an important window to observe this policy shift.

Walsh’s Communication Logic: Clear Goals, But No Path Provided

Morgan Stanley, through studying Walsh’s previous remarks at FOMC meetings, found that he is intentionally distancing the Fed from market expectations.

Walsh repeatedly emphasized only three dimensions: past inflation assessments—current inflation remains at high levels; future policy goals—pushing inflation back to target levels; and confidence in achieving the goal—maintaining high certainty about it.

But the issue is that this communication framework does not tell the market how the Fed will act.

In the past, the Fed typically used forward guidance to help shape market policy expectations, whereas Walsh prefers to let the market judge economic trends on its own and independently assess the potential policy path the Fed might take. He is not concerned about divergences between market and Fed views, nor will he adjust his policy stance to cater to market expectations.

Tighter Financial Conditions Do Not Mean the Fed Will Necessarily Stand Pat

The decision to pause rate hikes at the July FOMC meeting was partly based on the background that financial conditions had already tightened. Factors such as rising market interest rates and asset price adjustments partially served the role of monetary policy tightening, a point Walsh seemed to acknowledge.

However, Morgan Stanley believes that the market cannot simply infer that as long as financial conditions tighten, the Fed will reduce its actions.

Walsh does not believe that market-driven tightening can completely replace central bank policy. He focuses on whether the tightening of financial conditions has truly achieved the effect of suppressing inflation, rather than merely observing changes in market indicators.

If future data shows that tighter financial conditions have not effectively reduced inflationary pressures, Walsh may choose to intervene actively again. This is also an important reason why he avoids providing a clear policy path—he wishes to retain sufficient policy flexibility.

Risks Lurk in September Rate Hike Expectations as Market Awaits Signals from Jackson Hole

Currently, the market has largely priced in a 25 basis point rate hike at the September meeting, but Morgan Stanley warns that inflation data in the next two months could disrupt this expectation.

If July and August inflation data continue to exceed expectations, the market may re-bet on the Fed taking a more aggressive tightening path. Investors may conclude that the previous tightening of financial conditions was insufficient to suppress demand, and that the Fed needs to apply further pressure on the economy through actual rate hikes.

In this scenario, Walsh’s policy choices at the September meeting could shift significantly compared to July. He may judge that the market environment has not yet reached a sufficiently tight level, thus adopting policy actions more hawkish than currently priced by the market.

Morgan Stanley believes that this constitutes one of the largest tail risks in the current interest rate market. As the August Jackson Hole symposium approaches, investors will continue to look for clues about the policy reaction function in Walsh’s speeches and reassess the likelihood of a rate hike in September.