Waller’s hearing debut signals new policy direction; "New Federal Reserve news agency": stresses zero tolerance for high inflation but does not hint at rate path.
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The Federal Reserve Chairman Walsh’s first appearance at the Congressional monetary policy hearing revealed his “Fed New Deal manifesto,” without giving the market the most anticipated signals of rate hikes or cuts, but repeatedly emphasizing restoring price stability, maintaining the Fed's independence, and promising full advance communication on future balance sheet adjustments.
Nick Timiraos, a journalist known as the “New Fed News Agency,” believes that Walsh deliberately avoided giving any hints about future rate paths on that day, instead focusing the hearing on reasserting the Fed's long-term goal of controlling inflation.
Just before the hearing started, the U.S. June CPI came in lower than market expectations, briefly pushing the market to bet the Fed would loosen policy sooner. However, Walsh downplayed the significance of this data, saying he does not believe the inflation task has been completed.
Timiraos pointed out that Walsh did not use this inflation report to signal any policy inclination, nor did he reveal the rate path for the July meeting or afterward. Instead, he insisted that the Fed has two policy tools—interest rates and the balance sheet—and will decide how to use them based on economic data to achieve the goal of price stability.
Bloomberg believes this multi-hour hearing actually outlined the “New Fed” policy framework: upholding monetary policy independence, sticking to the 2% inflation target, rejecting the notion that employment and inflation are a trade-off, and leaving space for future balance sheet reform and central bank governance reform.
Impacted by Walsh’s somewhat hawkish remarks, U.S. Treasury yields gave back part of the post-CPI decline during the hearing, and the dollar index narrowed about half of its post-CPI drop.
Five Signals: Walsh’s First Congressional Hearing Outlines the “New Fed” Policy Framework
- Reaffirming “zero tolerance” for persistently high inflation, asserting that one CPI dip is not enough to declare victory over inflation
Walsh emphasized at the hearing that the Fed has “zero tolerance” for persistently high inflation. He said the Fed has failed to achieve the 2% inflation target for consecutive years, so restoring price stability remains the most important policy task.
Confronted with the day's significantly lower-than-expected June CPI data, Walsh said: “Some may say (the inflation) mission accomplished, I don't see it that way.”
Timiraos believes Walsh repeatedly reaffirmed the long-term inflation target without adjusting his policy stance due to improvement in a single month’s data, highlighting his intent to avoid market misreading one inflation report as a signal of imminent monetary policy shift.
- No hints about interest rate path, stressing future decisions will depend on data
Regarding the next rate move, which the market cares most about, Walsh remained restrained.
Timiraos noted that Walsh did not hint at upcoming policy directions for FOMC meetings, nor did he answer when rates might change, but stressed that the Fed has two tools—rate policy and balance sheet policy—and will use future economic data to judge if and how to deploy them.
However, Walsh disclosed he will discuss “if and when” policy tools are needed with his FOMC colleagues in the coming period, describing it as possibly a “family fight.”
Bloomberg believes that although Walsh did not give clear policy guidance, his overall stance remains hawkish, indicating he is unwilling to signal easing before confirming inflation is consistently back at target.
- Employment and inflation are not a “cruel choice” between two opposites
In response to lawmakers’ questions about the Fed’s dual mandate, Walsh denied the existence of a so-called “cruel choice.”
He said that as long as price stability is restored, the U.S. economy can continue to grow, and companies can continue to hire, so controlling inflation and achieving full employment are not mutually exclusive, but mutually reinforcing.
This statement further reinforces his policy philosophy that price stability itself is the foundation for sustained job growth and economic prosperity.
- Balance sheet reform will be announced in advance, avoiding sudden market shocks
Balance sheet reform has been an important issue since Walsh took office.
However, at this hearing, he said he was unwilling to pre-judge the findings of the balance sheet reform working group.
Meanwhile, he promised that if balance sheet policy is adjusted in the future, the Fed will communicate sufficiently in advance with the market, ensuring investors have ample expectations and avoiding sudden actions.
Walsh reiterated that the Fed’s balance sheet should serve monetary policy, not assume fiscal policy functions.
Reuters believes this statement helps ease market concerns about the possibility of a new round of balance sheet shrinkage proceeding too quickly and implies that the Fed will place greater importance on policy communication and managing market expectations.
- Insisting on monetary policy independence, winning positive responses from some bipartisan lawmakers
Facing lawmakers’ questions, Walsh re-emphasized that the Fed will maintain independence in formulating monetary policy, promising that rate decisions won’t be swayed by political factors.
Bloomberg reported that although Walsh received almost no Democratic support in the Senate confirmation, several Democratic senators actively praised his stance on central bank independence during the hearing.
Senior Congressional reporter Steve Dennis believes, given Trump’s continued public pressure for Fed rate cuts, some Democrats openly support Walsh’s defense of the central bank’s independence, reflecting subtle bipartisan changes on this issue.
Walsh Hearing Reinforces the “Data-Determined Policy” Communication Framework
What does the market make of Walsh’s hearing? Overall, Walsh’s remarks did not change the short-term rate outlook, but reinforced the new “data-determined policy” communication framework.
Timiraos believes the biggest feature of Walsh’s hearing is deliberately not releasing any signals about the interest rate path.
Faced with a lower-than-expected CPI report, Walsh did not discuss whether to cut rates next, nor did he give any forward guidance. Instead, he focused on restoring price stability, Fed independence, and policy tools, continuing his post-appointment approach of avoiding commitments based on single data points or meetings.
Bloomberg says the hearing further outlines the policy tone under Walsh’s leadership: continuing to prioritize price stability, advancing balance sheet and central bank governance reforms, and managing market expectations with more transparent communication.
For investors, this means future Fed policy will remain highly dependent on data performance rather than a preset rate path, and the market will pay more attention to how Walsh implements this philosophy into FOMC decisions in the coming months.
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