The market expected a clear signal but was “vaguely at the helm”. Walsh spoke on Friday or decided the direction of long-term treasury bonds, and the 30-year yield is likely to rise above 5.5%

The Zhitong Finance App learned that Federal Reserve Chairman Walsh will deliver a high-profile keynote speech in Jackson Hole on Friday. The market is trying to speculate on what kind of signals he may release on key issues affecting the economy and monetary policy. He will be speaking at the Federal Reserve's annual symposium in Wyoming. The theme of this year's conference is “Financial Innovation: Implications for Payments and Policy.”

Former Federal Reserve chairmen often used this occasion to explain their general ideas and intentions on the policy framework and interest rate trends in addition to the core topics of the conference. However, since taking over in May, Walsh has focused more on market trends rather than the Fed's own signals, and his style of conduct has made it difficult for the outside world to predict.

Luke Tilley, chief economist at M&T Bank and Wilmington Trust Investment Advisors, said, “People keep asking me what to expect, and I actually don't have many expectations. I think it's hard to predict what he'll say. If I had to speculate, I think he would give a very broad and broad discussion on the progress of the work of the various working groups and how the Federal Reserve should operate, rather than making specific and detailed assessments of economic and policy expectations.”

Walsh has set up five working groups to conduct a comprehensive review of the various functions of the Federal Reserve in the form of the so-called “first principle.” Its tasks include evaluating policymakers' views on inflation, balance sheet conditions, data indicators that influence decision-making, technology-related issues, and communication mechanisms.

On the last point, Walsh took a very different approach from his recent predecessor: he no longer uses carefully designed signals to guide market reactions, but instead favors a more detached “let go” strategy, letting the market interpret the data and send signals to the Federal Reserve.

This strategy has had mixed reactions so far, and may even have negative effects.

Markets look forward to more information

Tilley said, “I hope he can explain in more detail his personal views on the mechanism of inflation, or what channels and time delays monetary policy affects inflation. This doesn't even have to involve policy response functions; it only needs to clarify the basic transmission mechanisms of financial markets and monetary policy, because there are many channels involved in the middle.”

In the current context where treasury bond yields continue to rise, the market impact of Friday's speech is particularly significant.

Joseph Brusuelas, chief economist at RSM, stated, “Due to some unforced mistakes in Walsh's early days in office, we are about to welcome the most unusual Jackson Hole monetary policy seminar in recent memory. The market has raised expectations of this speech to a level where the Federal Reserve itself may not be happy.”

However, the risk goes far beyond market reactions.

Along with rising yields, Treasury Secretary Scott Bessent announced a plan last week to double the Treasury's off-the-run repurchases of old securities (off-the-run). The Ministry of Finance usually invests $2 billion per round of repurchase operations, but this scale will “at least” double when the next round of operations starts on September 9.

Although limited in size compared to America's huge debt stock, it could still create a difficult situation for Walsh. The fiscal and monetary authorities' intervention in the market appears to be contrary to Walsh's stated intentions so far.

Brusuelas said, “We are in a unique situation where the Treasury Department's actions have reduced Walsh's room for action. As a result, the Federal Reserve Chairman is in a dilemma.”

Market impact

One of the market's major complaints about Walsh since he took office is that not only was he unwilling to provide so-called forward-looking guidance, but he also failed to clearly define a “response function” — that is, the conditions that trigger a change in policy direction.

Mark Cabana, head of US interest rate strategy at Bank of America, said that if Walsh once again avoids the above content, it may cause significant market consequences.

Cabana wrote in a client report earlier this week: “In short, we expect Walsh to send a signal that he is ready to raise interest rates again if inflation does not continue to slow. Conversely, if he focuses only on macrostructural topics such as productivity or population structure in his speech, we are concerned that the market may interpret this as a dovish signal.”

Cabana further pointed out that under these circumstances, long-term treasury bonds are expected to be sold off, and the 30-year yield may rise to 5.5% or even higher, up more than 30 basis points from current levels, hitting a high level not seen since at least the beginning of this century.

So for Walsh, being specific is probably the best strategy. Brusuelas said, “Walsh can no longer continue to be ambiguous and vague; he needs to be more honest and clear about his position.”