The Federal Reserve is only a midfielder: Walsh cites a strong economy and suggests another rate hike in December

The Zhitong Finance App notes that Federal Reserve Chairman Kevin Walsh on Wednesday kept the Federal Reserve on the track of raising interest rates again this year, even though he insisted on refusing to give any clear guidance on the future policy path.

Within its self-established communication boundaries, Walsh used his assessment of a strong economy and a warning of continued inflation to send a signal to the outside world that the Federal Reserve's mission was unfinished. The statement strengthened market expectations: after being put on hold on Wednesday, officials will raise borrowing costs in December, and may raise interest rates again in early 2027. Despite this, Walsh was careful to make room for himself.

Vincent Reinhart, chief economist at BNY Investments, said, “He's paving the way for further tightening, but he's also framing — not necessarily that much tightening is necessary.”

At the opening of the press conference on Wednesday, Walsh listed the strong points of the economy one by one: GDP was raised to 2.4% in the first half of the year, the growth rate was moving towards more than 3% in the third quarter, corporate investment achieved double-digit growth, and the number of initial jobless claims was close to a record low. Walsh believes this potential resilience has given the Federal Open Market Committee (FOMC) the space it needs to focus entirely on the rate of inflation — an inflation rate that has hovered above the Federal Reserve's 2% target for nearly six years.

He also emphasized the Federal Reserve's willingness to act, as evidenced by their unanimous decision in September to raise interest rates for the first time in three years. At the same time, he stressed that the “information-rich interval” between now and the December meeting will be of great benefit to the Federal Reserve, which will include new growth and inflation data released on Thursday.

After the Federal Reserve maintained the benchmark federal funds rate in the range of 3.75% to 4% with 10 votes in favor and 2 against, Walsh said, “It is our responsibility to bring inflation back down.” “This is why the FOMC discussions over the past few days have focused mainly on the price-stabilizing side of the mandate.”

Tough statement on inflation

For some traders, Walsh's performance wasn't hawkish enough. The two-year US Treasury yield, which is more sensitive to Federal Reserve policy, fell 4 basis points to 4.7%. Long-term yields rose slightly.

However, many economists say they expect the Federal Reserve to raise interest rates a total of two more times, actually reversing its move to cut interest rates at the end of 2025 to support a weak job market. As of Wednesday afternoon, investors expect the Federal Reserve to raise interest rates in December and March, based on the pricing of futures contracts.

“We still think they'll act in December.” Oscar Muñoz, the US chief macro strategist at TD Securities USA, said, “I think the threshold for them not to raise interest rates is very high.”

The decision to keep interest rates unchanged drew two negative votes: Federal Reserve Governor Lisa Cook and Cleveland Federal Reserve Chairman Beth Hammark preferred to raise interest rates. Some policymakers who have been warning of high inflation include Dallas Federal Reserve Chairman Lori Logan and Minneapolis Federal Reserve Chairman Neil Kashkari who voted in the majority.

But Nationwide's chief economist Cathy Bostjancic said they are likely to support the decision because they expect the Federal Reserve to raise interest rates again in December.

Even though the December rate hike was on the table, Walsh made it clear that he was not planning to stifle growth, implying that he wanted to keep inflation down without slowing down corporate investment or employment.

When asked to what extent inflation is driven by demand driven by a boom in artificial intelligence construction, Walsh's conversation turned to uncounted potential increases in labor productivity and technological efficiency.

“Is the economy overheated? Is the economy too strong? That's not the judgment of most of my colleagues.” Walsh said, “Economic growth is higher, but that doesn't tell me that economic growth is generating inflation to some extent and making our jobs harder.”

He added that the goal of the Federal Reserve “is not to throw sand into the cogs of the economy, nor to make people lose their jobs.”

Where Walsh sounded more cautious — he acknowledged that credit conditions had been tightened since the Federal Reserve raised interest rates in September — he did not further assert that market conditions were tight enough to slow growth on its own.

“Despite the tighter overall financial conditions, I don't want to and cannot call them 'tight'.” Walsh said.

For Brett Ryan, a senior US economist at Deutsche Bank, Walsh's refusal to call financial conditions “tight,” combined with his optimistic assessment of growth, actually confirmed the “interest rate will be raised again this year” path in the Federal Reserve's September forecast.

“He was saying they would tighten it further, but he just didn't say it clearly.” Ryan said.