The Jackson Hole Conference became a moment for Walsh to “walk a tightrope”: it is necessary not only to refute criticism, but also to conceal policy clues

The Zhitong Finance App noticed that Kevin Walsh's first major speech as Chairman of the Federal Reserve had unexpectedly evolved into a test of his streamlined communication style.

The challenge facing Walsh was not only to counter criticism accusing him of not being able to express his economic views honestly, but also not to compromise on his determination not to provide investors with clues about future policy directions.

The Federal Reserve's annual seminar in Jackson Hole, Wyoming, is an opportunity for him to seek this balance. Walsh will speak at this seminar on Friday.

A shaky press conference last month sparked severe criticism from the bond market, and the pressure from Wall Street was extremely heavy as a result. Since then, economists and analysts have relentlessly criticized Walsh; in their view, he went too far in his exploration of limiting the Federal Reserve's communication.

Last week, Treasury Secretary Vincent announced an unexpected repurchase of US Treasury bonds to reduce long-term yields, making Walsh's task even more difficult.

Anviti Bahuguna, Co-Chief Investment Officer of Beixin Asset Management, said, “Obviously, Walsh wants to say less,” “but maintaining some transparency and communicating about why you are in the current situation and what you have seen today is a reasonable requirement for the market.”

That doesn't mean the new chairman is likely to make any apologies. Walsh's supporters said the market was overreacting to his July press conference. Inflation expectations — which should rise if confidence in the Federal Reserve falls — have moved only moderately and remain anchored at levels consistent with the Fed's 2% target. They believe that treasury bond yields are mainly driven by factors such as a surge in government and corporate borrowing.

Randall Crosner, a professor of economics at the University of Chicago and the governor of the Federal Reserve from 2006 to 2009, believes that Walsh has only just begun to carry out communication reforms aimed at curbing clear policy forward-looking guidelines.

“Markets get it wrong sometimes. “When I worked at the Federal Reserve, the market made a lot of mistakes,” Krosner said. “When a new approach comes along, there's always some kind of run-in period.”

Washington's Federal Reserve colleagues, including San Francisco Federal Reserve Chairman Mary Daly and St. Louis Federal Reserve Chairman Alberto Mussalem, have also refuted the accusations that the Fed's credibility has been damaged.

In an interview, Daly said, “I haven't seen our credibility threatened.”

The turbulence of the press conference

Things don't have to be so controversial.

After taking office in May of this year, Walsh won praise for repeatedly emphasizing that the Federal Reserve will return the inflation rate to 2% during his tenure. While testifying to members of Congress in July, he said the Federal Reserve has zero tolerance for inflation.

This has allayed concerns that Walsh, who was appointed by President Donald Trump, would hinder rate hikes when circumstances required. Trump has lashed out at Walsh's predecessor and promised to appoint a new chairman who would cut interest rates.

His first major turmoil occurred after the Federal Reserve's July policy meeting, when policymakers voted to keep the benchmark federal funds rate unchanged. Although three officials voted against it, the decision was expected and has been priced in the bond market. It was Walsh's press conference after the meeting that drew widespread criticism from investors and economists.

Federal Reserve observers said that there were three key aspects of the press conference: first, there was a lack of explanation for why the policy remained the same; second, Walsh was unwilling to see the interest rate hike as an obvious policy tool that might still be needed; and third, a casual comment about the Fed's 2% inflation target, which led some people to think that the target might be revised in January next year.

The end result was the harshest sell-off in years in the bond market, as well as massive criticism of Walsh's communication style. Following Walsh's speech, 30-year US Treasury yields soared to their highest level since 2007.

Robert Terlow, a former senior policy adviser at the Federal Reserve, said, “Walsh was unable or unwilling to explain why there were no policy actions in July, even when directly questioned. It's confusing,” “It should have been easy for him to do this without falling into forward-looking guidance.”

This sell-off has continued in recent weeks. Admittedly, the Federal Reserve is not entirely to blame for this. Investors are increasingly concerned about rising US debt, and as Washington borrows more, it is competing with technology companies that invest money into artificial intelligence. Furthermore, rising yields on European and Japanese sovereign bonds suggest that investors' concerns go beyond US inflation.

Adam Hicklin, a senior economist at Pioneer Pilot Group, said, “Currently, various factors are coming together, all of which are more or less leading to higher long-term returns.”

Bezent's plan to reduce yields by buying back longer-term bonds is another potentially complicating factor facing the Federal Reserve, especially if the planned purchases are funded by expanding sales of shorter-term debt. That would invade the treasury bond yield curve area where the Federal Reserve has traditionally dominated.

What is slightly reassuring for Walsh is that data since the July policy decision generally points to a slowdown in economic activity, which may ease the pressure on the Federal Reserve to raise interest rates. Retail sales recorded their biggest drop in more than a year in July, while core inflation remained moderate. Meanwhile, the employer unexpectedly reduced jobs in July, and the recruitment data for the previous two months was also lowered.

Despite this, many agree that Walsh needs to respond to his critics.

Duke University economics professor Alan Mead said that the Federal Reserve chairman needed to balance his desire to reduce forward-looking guidance with maintaining transparency. Mead advised officials during his decades-long career on the Federal Reserve Committee.

“Walsh didn't do much for himself,” she said. “He's driving himself to a dead end.”