ROI - Raise interest rates by 50 basis points? Walsh-led Fed faces communication challenges: McKeefer

The views expressed in this article are solely those of the author, who is a Reuters columnist.

Jamie McGeever

Reuters, Orlando, Florida, November 11 - Fed Chair Kevin Walsh’s disdain for “forward guidance” (link) is palpable. Unfortunately, what has filled this communication gap is precisely the opposite.

Since taking over as Fed Chair from Jerome Powell in May, Walsh has been committed to a sweeping overhaul (link) of nearly every aspect of the Fed’s operations, from reducing the number of policy meetings per year to fundamentally restructuring its decision-making framework. Information chaos has become a hallmark of the new-look Fed, rather than a flaw.

Walsh has repeatedly guided markets not to read too much into individual data points, insisting that the Fed should not bind itself to forecasts.

Yet, on Tuesday in London, Fed Governor Christopher Waller (link) made statements to the contrary. He said that if the core Consumer Price Index (CPI) for October, which was due for release yesterday, posted a month-on-month gain of 0.3% or higher, a 50 basis-point rate hike should be considered for next month. Hours later, the figure was confirmed at 0.3%.

Waller’s hawkish “pivot” triggered a sharp rise in U.S. bond yields and left investors confused as to what the policymakers’ “reaction function” really was.

“Inconsistency”

Waller is seen as one of the most influential members among the Fed’s 19-member Federal Open Market Committee (FOMC). His recent significant shifts in policy stance highlight larger problems with the Fed’s messaging.

He dissented from the FOMC’s decisions to keep rates unchanged last July and this January—twice voting against, advocating for a 25 basis-point rate cut. As recently as March 20, he said, “If the labor market continues to weaken, I will again advocate for lowering policy rates later this year.”

To go from those comments to putting a half-point rate hike on the table in just seven months is a 180-degree turn. For context: excluding the tightening cycle in 2022-23 triggered by post-pandemic and Russia’s invasion of Ukraine’s historically high inflation (link), the Fed has raised policy rates by 50 basis points just once in the past 30 years. That was in May 2000, a move that helped burst the dot-com bubble.

Admittedly, October’s CPI report showed more persistent inflation than officials had expected. Energy prices have remained elevated for months, and their effects appear to be spreading through the economy. Even so, the timing of Waller’s abrupt hawkish shift is questionable. Since the Fed kept rates unchanged on October 28, oil prices have fallen nearly 20%, one-year inflation swaps have dropped below 2%, and the AI boom powering both the economy and Wall Street has cooled—Nasdaq is down 6%, and semiconductor stocks suffered their second largest single-day fall on record last Thursday.

“It’s hard to figure out what he’s thinking right now,” said Brent Donnelly of Spectra Markets. “The Fed … is undecided because nobody knows how to conduct monetary policy in the face of supply shocks.”

https://www.reuters.com/graphics/AUTOMATED-20271029/COMBINED-TREASURY-YIELD-FORECAST-365D/egpbgzjnyvq/chart.png

Family Feud or Mixed Signals?

Of course, there’s another perspective on this.

The curveballs Waller is throwing with respect to inflation may simply reflect the heated debates taking place at the FOMC table—something Walsh affectionately calls an “old-fashioned family quarrel.” A wide range of opinions among policymakers is healthy and desirable.

But when that leads to messaging that is confusing or contradictory, it becomes a problem. And that is precisely what markets are feeling now.

Recent signals from other Fed officials—even hawks such as Cleveland Fed President Beth Hammack—suggest a preference for gradual tightening rather than a large rate hike at the first meeting after a pause. In fact, as of last weekend, the market had not even fully priced in a 50 basis-point increase for the remainder of the current rate hike cycle. Now, markets expect a 75 basis-point increase.

What if October’s core CPI had increased by just 0.246% instead of 0.296%, rounding down below Waller’s threshold? Would two-year U.S. Treasury yields have soared 20 basis points—the biggest rise since April last year? Would the rates market have revised up the expected number of hikes from two to three? Not likely.

An excessive focus on the precise value of specific data points puts markets on a knife edge. This also contradicts Walsh’s philosophy—that tackling inflation “shouldn’t depend on any one data point in isolation” and that “trends are the key.”

If that’s the case, then a 25 basis-point rate hike last month would have made more sense than a 50 basis-point hike in December.

(The views expressed in this article are solely those of the author, who is a Reuters columnist.)

Enjoy this column? Follow Reuters Open Interest (ROI), your indispensable new source for global financial commentary. Follow ROI on LinkedIn and X.

You can also listen to the daily podcast “Morning Bid” on Apple, Spotify, or the Reuters app. Subscribe for essential seven-day-a-week coverage as Reuters reporters explore the biggest news moving markets and finance.

(For the convenience of non-English speakers, Reuters has automated the translation of its reports into several other languages. As automated translation may include errors or lack necessary context, Reuters does not guarantee the accuracy of automated translations, which are offered solely for reader convenience. Reuters accepts no liability for any damage or loss caused by the use of automated translation functions.)