Zheshang Securities: Short-term eagles for long-term pigeons -- the signal sent by the Jackson Hole Central Bank Annual Meeting

The Zhitong Finance App learned that Zhishang Securities released a research report saying that the core of Walsh's speech was to reaffirm the overall PCE target of 2% and acknowledge that financial environment restrictions are insufficient. As of August 28, federal funds futures showed a 57% chance of raising interest rates in September, up 22 percentage points from the 27th. The bank believes that this statement not only fixes the Federal Reserve's inflationary credit, but also shows that it has made phased concessions in the face of internal and external hawkish pressure. If financial market turmoil or inflation falls back unsatisfactory in the future, the Federal Reserve's policy line may quickly adjust back to Walsh's original “interest rate cut, downsizing, and deregulation” path.

The main views of Zheshang Securities are as follows:

Walsh was hawkish, stressing that PCE inflation targets and financial conditions are not restrictive enough, and that reforms are still vague

In terms of inflation, Walsh placed price stability at the core of monetary policy principles, making it clear that the 2% target measured by the overall personal consumption expenditure price index (PCE) is “fixed and firm,” and did not mention the final average PCE. Combined with current data, Walsh pointed out that PCE was still 3.7% year on year in July, with about half of the PCE segment rising by more than 3%. The improvement in inflation over the past two years was “relatively limited”, and recent data is not enough to prove that the potential trend has substantially improved. Meanwhile, US consumption, corporate capital expenditure, and labor markets remain resilient, and the credit market shows little sign of policy restrictions. The policy standard is that it must be convinced that potential inflation is being targeted clearly and fast enough, otherwise the Federal Reserve “still has work to do.”

In terms of forward-looking guidance, Walsh continued to downplay the forward-looking direction of reform. Walsh said that forward-looking guidance “has been around for too long” and that it is easy to “create ambiguity in the name of clarity,” and that market participants should track the data and form their own judgments. Although Walsh clarified the principle that “potential inflation needs to fall fast enough,” he believes that the current perception does not provide a clear response function, and he is still working with his colleagues to construct models and rules.

In terms of artificial intelligence, Walsh emphasized the focus, but the incremental information in his speech was limited. Walsh refers to AI as a “new variable” or even a new factor of production that may affect economic and monetary policy, and acknowledges its potential to bring about higher growth and productivity, but it mainly focuses on asking questions, including when productivity will be realized, whether to replace labor, and how to distribute return on capital, and has yet to give a quantitative judgment on potential growth rates, inflation, or neutral interest rates.

In terms of abridging, no new policy information was given in this speech. Walsh did not mention the target size of the balance sheet, the pace of reduction, or coordination arrangements with the Ministry of Finance; he only emphasized that short-term interest rates are still the main tool for achieving the dual mission, and that the specific path still needs to be determined by the relevant working group.

Overall, the meeting was hawkish, stressing that PCE is the Federal Reserve's inflation target, but the reform of the monetary policy framework remains vague.

Walsh conveyed his data analysis framework, which also reflected a hawkish stance

In terms of inflation: The first is to focus on whether traditional indicators such as PCE and CPI continue to be above 2%. Walsh mentioned that overall PCE has risen 3.7% in the past 12 months, and the annualized increase of 4.1% in the past 6 months; CPI is also at a high level, and both core PCE and core CPI are above target.

The second is to focus on the extent of the spread of inflation. Using the PCE subsection, the 12-month and 6-month annualized increases account for more than 3%. According to it, “In the past 12 months, the prices of 54% of goods and services in the PCE basket have risen by more than 3%, which is lower than the peak of about 77% after the pandemic, but it is still significantly higher than the level of about 32% in the 20 years before the pandemic; in the past 6 months, this ratio also reached 49%.”

The third is to pay attention to commodity prices and determine whether there is a new risk of exogenous inflation.

Fourth, focus on inflation expectations, including medium-term inflation expectations (overall stability) and swap market inflation compensation (equally stable).

In terms of economic growth: Walsh mainly focuses on three types of data: corporate investment, corporate profits, and private demand:

The first is corporate capital expenditure. The usage indicator is the annualized growth rate of enterprise equipment and intangible asset investment (about 9%).

Second, corporate profits. Using the S&P 500, corporate profits grew at a year-on-year rate (over 20%, at an all-time high). Furthermore, Walsh clearly mentioned focusing not only on whether profits are growing, but also on “second-order changes” in the growth rate of profit and capital expenditure, as well as its transmission to asset prices, business confidence, and residents' income.

The third is private demand. The usage indicators are the year-on-year growth rate of actual consumption (over 2%), and the final increase in private domestic purchases since this year (close to 3%). Compared to GDP, which is easily disturbed by inventories, government spending, and net exports, Walsh believes that final private domestic purchases better reflect the endogenous needs of the US economy. Currently, this indicator still does not show a significant cooling of the economy.

In terms of financial conditions, Walsh mainly focuses on three types of data: capital market financing, bank credit, and local industry pressure:

The first is capital market financing conditions. The indicators are interest spreads on corporate bonds and leveraged loans (close to historical lows), related market issuance scale (remaining strong), and low stock market volatility, indicating that it is still relatively easy for enterprises to finance through the capital market.

The second is bank credit conditions. The indicators are industrial and commercial loan standards (at a historically relaxed level) and related loan balances (growth) as shown by bank loan surveys. Based on this, Walsh believes that the current level of interest rates has not significantly curtailed the supply of credit.

The third is to pay attention to whether pressure on local industries is spreading. There has been some pressure in areas such as housing and agriculture, but financing and demand from other sectors are still strong. As a result, Walsh believes that local weakness is not enough to prove that the overall financial environment is limited.

In terms of the labor market, Walsh mainly focuses on three types of data: unemployment, employment growth, and wage growth:

The first is unemployment. Focus on the unemployment rate, unemployment benefit claims (four-week moving average), labor market turnover rate, and local unemployment data. It is believed that the current unemployment rate and four-week moving average of the number of first-time jobless claims are all low, labor market mobility is low, and some groups, such as fresh graduates, are facing some employment pressure, and overall they are still in a state of full employment.

The second is employment growth and labor supply. Walsh believes that in a situation where the supply of labor hardly increases, new monthly jobs will naturally be at a low level.

The third is the rate of wage growth. It is believed that wage growth is currently moderate, but wages have not been a reliable leading indicator for predicting future inflation for a long time.

The bank believes that hawkish statements reflect policy concessions. If market feedback is not as good as expected, adjustments may be made later

The bank believes that Walsh's hawkish statement this time is a phased concession to the hawkish elderly in the market and committee, as well as a policy trial and error. A small number of FOMC participants have proposed reasons for interest rate hikes in June. Hamak, Kashkari, and Logan further voted to raise interest rates by 25 bps in July, indicating that traditional hawks are putting increasing pressure on Vash. Compared to Walsh's previous policy path of “interest rate cut+downsizing+regulatory reform,” this time emphasizes that the 2% overall PCE target and financial conditions are not restrictive enough, reflecting Walsh's temporary acceptance of the hawkish narrative to unify the Commission's position and repair the Federal Reserve's inflation credit.

If feedback from hawkish statements or even substantial interest rate hikes is not ideal, the Federal Reserve's policy line may be adjusted. The feedback from the capital market after the hawkish statement last night was unsatisfactory. During the speech, US stocks rose for a while, 10-year US bond yields fell, then both reversed. US stocks closed down, and long-term US bond yields rose. The bank believes that it reflects a shift in the main line of market transactions from credit repair to substantial interest rate increases. If subsequent hawkish communication or even actual interest rate hikes have limited improvement in inflation, or higher interest rates cause financing pressure and obvious shocks in the financial market, the hawkish policy may be difficult to sustain. At that time, the Federal Reserve may return more quickly to the original path of Walsh, that is, by cutting interest rates in line with downsizing, deregulation, and multi-sector collaboration, it will be possible to reshape the credit of the US dollar and US bonds while maintaining liquidity.

How do you understand Walsh's “abbreviation”?

On April 21, 2026, at the US Senate Banking Committee Chairman's nomination confirmation hearing, Walsh said, “We must work with the Treasury Secretary to find a way to reduce the Fed's balance sheet.”

Walsh's “downsizing” is ahead to relax financial institution supervision. The Federal Reserve may passively downsize to avoid squeezing liquidity

Market concerns about traditional downsizing (QT) stem from the end of the previous downsizing cycle (2019). The Federal Reserve continued to shrink and squeeze banking system reserves without the banking system's demand for reserves being depressed, causing sharp fluctuations in short-term interest rates and general pressure on risk assets. The risk of “private equity credit” also broke out in October '25, and the Federal Reserve immediately launched a “reserve management tool” in December '25 to expand the table slightly.

The core difference of Walsh's “downsizing” is that financial deregulation comes first, while downsizing may come later:

Research by Rajan, head of the Federal Reserve's balance sheet reform team, indicates that QE and QT are not mirrored processes. In QT, commercial banks' balance sheets must be adjusted first; otherwise, it may lead to a “money shortage” and the loss of previous achievements (see the previous report “What Signals Were Advisors for the Walsh Reform Sending?”)

In addition to Rajan, Milan issued the “User Guide to Reducing the Federal Reserve Balance Sheet” as early as March 2026, which also provides guidance on Walsh's potential reforms. The article indicates that policy options corresponding to “downsizing” generally include two categories:

The first is to reduce commercial banks' reserve requirements, including policies such as supplemental leveraged reserve ratio (SLR) reduction, to guide banks to reduce reserve requirements through deregulation;

The second is to reduce the crowding out of balance sheets by non-reserve liabilities such as the Treasury (TGA), including reducing US Treasury Account (TGA) balance management targets, etc.

In terms of the scale of the downsizing, Milan uses 15 types of policies to estimate the potential “release” of liquidity. The overall future downsizing scale is 1.2 trillion to 2.1 trillion US dollars. The goals of the Milan guide are more aggressive, and clearly abbreviate “it will take at least a year, and probably several years” before it can be launched.

Whether gold returns to the “de-dollarization” narrative remains to be seen

US 10-year Treasury Bonds: The bank believes that the uncertainty of monetary policy may reverse; the probability that long-term supply will deteriorate beyond expectations is not high. Under energy pressure, Trump's TACO probability is rising, and the Q4 long-term US debt declined slightly. The risk of rising US bond yields is that the US-Iran geopolitical game escalates beyond expectations, and the pulse may “break 5” at that time.

Whether gold reverses remains to be seen. The nomination of Walsh in January '26 led to a sharp drop in gold, mainly due to the market's belief that Walsh might drive the restructuring of the dollar's credit. Since this year, gold has returned overall to the “dollar pricing model” associated with negative real interest rates on 10-year US bonds. In the past two weeks, due to Walsh's lack of clarity in communicating the monetary policy framework reform and response function, Bezent's buyback policy has further weakened the credit of US bonds. As a result, the market has gradually experienced a “combination” of de-dollarized characteristics of rising real interest rates on 10-year US bonds, weakening the US dollar, and strengthening gold. Looking at this time alone, Walsh's adjustment of the policy stance, especially the “inflation” position, has given a certain boost to the credit of the US dollar, and we still need to continue to observe further statements at the September interest rate meeting in the future. Whether gold returns to the “de-dollarization” narrative remains to be observed.

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