Wall Street "ponders" Walsh's speech: suggests further rate hikes, but not by much

The Federal Reserve maintained interest rates on Wednesday, but Chairman Waller's remarks were interpreted by the market as a clear signal that there could still be a rate hike later this year, though the scale is likely to be limited. This intentionally “unsaid” communication strategy left Wall Street analysts and traders making their own interpretations, gradually clarifying market expectations for the policy path.

On Wednesday (October 28), The Federal Reserve decided by a vote of 10 to 2 to keep the target federal funds rate range unchanged at 3.75% to 4%. The market immediately shifted focus to the December meeting, expecting another rate hike possibly in early 2027. During the press conference, Waller highlighted robust economic data as groundwork, putting the reality of inflation remaining above the 2% target for nearly six years at the center of policy discussions, suggesting that the Fed’s work is not yet done.

Several economists believe that Waller’s remarks actually pave the way for a rate hike in December, while deliberately preserving policy flexibility. Vincent Reinhart, Chief Economist of BNY Investments, summarized it as: “He is laying the groundwork for further tightening but also drawing a line—not too much tightening is needed.” Futures market pricing indicates that investors currently expect the Fed to raise rates in both December and again in March next year.

Market Interpretation: Hawkish Tone Not as Strong as Expected, but Hike Path Basically Set

For some traders, Waller's statement was not hawkish enough. The US two-year Treasury yield, which is more sensitive to Fed policy, fell 4 basis points to 4.7%, while the long-end yield rose slightly.

Nevertheless, many economists still hold that the Fed will raise rates two more times, believing that this would essentially reverse the rate cuts implemented by the end of 2025 to stabilize a weakening labor market.

"We still believe they will act in December," said Oscar Muñoz, Chief US Macro Strategist at TD Securities USA. "I think the bar for not raising rates further is very high."

Brett Ryan, Senior US Economist at Deutsche Bank, noted that Waller refused to characterize current financial conditions as “tight,” combined with his optimistic assessment of economic growth, which in fact corroborates the Fed's September forecast of a further rate hike this year. "He conveyed a signal of further tightening without stating it explicitly," Ryan said.

Strong Economic Data Leaves Room for Hikes

At the start of the press conference, Waller listed several economic highlights: First-half GDP revised up to 2.4%, third-quarter growth tracking over 3%, double-digit growth in business investment, and jobless claims near historic lows. He believes this inherent resilience gives the Federal Open Market Committee (FOMC) ample space to focus on its inflation target.

Waller also cited the September rate hike decision as evidence of the Fed's willingness to act—this was the first rate hike in three years and passed unanimously. He emphasized that the period between now and the December meeting is an “information-rich window,” during which new growth and inflation data will be released, including data coming out on Thursday.

"It is our responsibility to bring inflation down," Waller stated. "That's also why recent FOMC discussions have primarily focused on our mandate of price stability."

Deliberate Ambiguity: Not Killing Growth, Nor Declaring Conditions as Tight

In this speech, Waller deliberately balanced a hawkish stance with supporting growth. He made it clear that the Fed’s goal is not to “throw sand in the economic gears or cause people to lose their jobs,” and implied a desire to contain inflation without hurting business investment and employment.

When asked whether demand from artificial intelligence infrastructure building is driving inflation, Waller shifted to emphasize the potential improvements in labor productivity and technological efficiency, and said:

"Economic growth is higher, but that doesn’t mean economic growth itself is generating inflation and making our job harder."

On financial conditions, Waller acknowledged that credit conditions have tightened since the September rate hike but refused to declare that market conditions are tight enough to curb growth on their own. “While overall financial conditions are tighter, I am neither willing nor able to characterize them as tight,” he said. This was interpreted by the market as suggesting that the Fed still needs to finish the tightening task through further rate hikes.

Internal Divergence: Two Dissenting Votes, Hawks May Pause for Anticipated December Hike

The decision to hold rates steady was not without controversy. Fed Governor Lisa Cook and Cleveland Fed President Beth Hammack voted against, favoring an immediate rate hike.

Notably, Dallas Fed President Lorie Logan and Minneapolis Fed President Neel Kashkari, who have consistently warned of high inflation, sided with the majority this time. Nationwide Chief Economist Kathy Bostjancic believes:

The main reason they supported the pause is likely that they expect the Fed to raise rates again in December.