Waller's hawkish hint leaves markets guessing over Fed policy

what happened

Reuters columnist Jamie McGeever argues that communication at the Federal Reserve under Chair Kevin Warsh has become muddled. Warsh, who replaced Jerome Powell in May, is reshaping the central bank, from the number of policy meetings to its entire decision-making framework. He is skeptical of forward guidance, yet officials are sending markets signals that point in different directions.

On Tuesday in London, Governor Christopher Waller said a half-point increase in borrowing costs next month could be considered if October's core CPI rose 0.3% or more. A few hours later the figure came in at exactly 0.3%, and US bond yields jumped. Only in March Waller had backed rate cuts if the job market weakened, so such a sharp shift within about seven months stands out.

McGeever points out that since the pause on October 28, oil has dropped nearly 20%, one-year inflation swaps have fallen below 2%, and the Nasdaq is down 6%. Against that backdrop, the hawkish turn looks odd. Brent Donnelly of Spectra Markets said it is hard to follow the Fed's approach during a supply shock. The columnist allows that this could reflect healthy debate on the committee, but when that debate produces contradictory messages, markets lose their bearings.

why it matters

For investors, the key takeaway is that the Fed is being read through single data points and scattered comments rather than a clear rate path. That keeps US Treasury yields volatile and makes rate expectations harder to judge. At the end of last week, markets were not fully pricing even 50 bps of hikes for the rest of the cycle, and they now expect around 75 bps, according to the author.

market impact

US Treasuries: hawkish Fed signals push yields higher and bond prices lower

• ▼US 2-year Treasuries pressure down — rising yields after Waller's hawkish remarks lower bond prices

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