Rifts Emerge Within the Federal Reserve—Can Waller's Speech Set the Tone for Policy Direction?

According to Zhitong Finance APP, on Thursday local time, Federal Reserve officials continued to send mixed signals regarding the inflation outlook: some policymakers believe further rate hikes are needed to suppress prices, while others are taking a more cautious stance. This divergence occurs just as Federal Reserve Chair Kevin Walsh is scheduled to deliver a keynote speech at the annual central banking seminar in Jackson Hole, Wyoming, on Friday morning local time.

Clear Divisions Within the Fed: Hawks Advocate Further Rate Hikes, Some Policymakers Prefer to Wait

Kansas City Fed President Jeff Schmid stated that the Fed’s rate policy has not restrained the U.S. economy. Cleveland Fed President Beth Hammack echoed this view; she was among those who opposed the decision to keep rates unchanged last month.

They clearly suggested that, to bring inflation back to the 2% target within a reasonable timeframe, rates need to be raised. Schmid said in an interview, “To me, short-term rates may still be relatively loose. So we have a lot more work to do.”

Hammack expressed a similar viewpoint, saying the current rate level doesn’t sufficiently restrain the economy to allow price pressures to ease on their own. Hammack stated, “We should implement some restrictive measures to help inflation fall back to target. The longer inflation persists above target, the harder it is to bring it down.”

Other Fed officials are adopting a more cautious approach.

Boston Fed President Susan Collins believes there is still evidence that the Fed’s current policy, at least to some extent, suppresses the economy and helps slow inflation. Collins said, “I still feel rates are somewhat restrictive.”

Chicago Fed President Austan Goolsbee stated that he is still assessing the inflation outlook. “I need evidence to show that this inflation shock won’t persist. I can wait for that evidence,” he said. “But if the data starts to rebound, especially in the service sector—such as persistently high inflation, wrong direction, or stalled progress—then I’ll start to get nervous.”

This divergence highlights that there is no consensus within the Fed on the rate path, and markets are watching Friday’s speech by Walsh to see if it provides clearer direction.

Economists Also Divided

It’s not just the Fed; economists are also split on whether rate hikes are needed in the coming months to curb inflation.

Notably, U.S. inflation has stayed above the Fed’s 2% target for 65 consecutive months. The latest price data released Wednesday showed the Fed’s preferred inflation gauge—the Core Personal Consumption Expenditures Price Index (PCE)—rose 3.7% year-on-year in July, unchanged from June and above analysts’ expectations of 3.6%.

Ellen Zentner, chief U.S. economist at Morgan Stanley Wealth Management, said after the July PCE data was released that the mildly higher-than-expected inflation and relatively strong economic performance were “not what investors or the Fed want to see,” but this set of data is “not enough to tip the scales for the September FOMC meeting,” and a September rate pause remains the likely scenario. She also noted that if subsequent data shows continued sticky inflation, “the Fed may feel more pressure to act.”

Ariane Curtis, senior economist at Capital Economics, believes the July PCE data is “not enough to prompt a Fed rate hike in September.” However, she emphasized that Core PCE is still as high as 3.3% year-on-year, well above the Fed’s 2% target, and combined with resilient economic growth and a relatively strong labor market, there is considerable resistance to falling inflation. She warned clearly: a rate hike is only a matter of time, predicting a 25-basis-point hike in December followed by another in early next year.

Goldman Sachs Chief Economist Jan Hatzius said earlier this month that market pricing for further Fed rate hikes is “still too hawkish,” and a September hike has become “very unlikely.” Goldman’s base case remains that the Fed will keep rates unchanged until the end of 2026.

According to federal funds futures data, investors currently see about a 36% chance of a rate hike in September.

Walsh's Reform Proposal Receives Initial Support: FOMC Meetings May Be Reduced to Six per Year

Additionally, both Schmid and Goolsbee are open to Walsh’s reform suggestion—to reduce the number of Federal Open Market Committee (FOMC) policy meetings from eight to six per year. Walsh has solicited feedback from the committee on this proposal.

Goolsbee said it is “worth considering” and should be on the discussion table. Schmid believes the development of new technologies means policymakers may get a quicker read on the economy. “If information becomes more timely, fewer meetings could actually make us more efficient. But that information must be more real-time than it is now.”

Walsh will deliver his speech at 10:00 am New York time on Friday. Since taking office, Walsh has adopted a “less talk, more listening” communication style, emphasizing less forward guidance, and encouraging markets to rely more on hard data rather than officials' comments to determine policy direction. While this approach grants the Fed greater policy flexibility, it has also left investors persistently confused about the rate outlook. Markets are watching to see how Walsh will articulate his views on the economy, inflation, and rates at the Jackson Hole meeting, and whether he will signal a new policy path.

Apollo Global Management believes that Walsh’s speech at Jackson Hole on Friday will contain a “hawkish tone” in his economic outlook in order to control long-term yields. “Walsh is absolutely right, forward guidance is not a good idea,” said Torsten Slok, Apollo’s chief economist. “But most agree that framework guidance is a good idea, and now we need to get some framework guidance from him.”

TD Securities analysts warn that it is unlikely Walsh will entirely change his communication strategy, and the market “faces a high risk of disappointment.”