Viewpoint roundup: Waller says rate hikes may be needed soon to rein in core inflation
Fed Governor Waller said that if underlying inflation continues to indicate widespread price pressures, policymakers may need to raise interest rates in the near future. Wall Street’s advice to Warsh: It’s okay not to provide forward guidance, but to clarify the logic of policy responses. Fed governor makes a big statement: Waller says that to control core inflation, interest rates may need to be raised soon Federal Reserve Governor Christopher Waller said policymakers may need to raise interest rates in the near term if underlying inflation continues to indicate widespread price pressures. "If core inflation spikes again this week, the FOMC will need to consider tightening monetary policy in the near term," Waller said in a speech prepared for an event in New York on Monday. Advice from Wall Street to Warsh: It’s okay not to provide forward guidance, but make the logic of policy responses clear Federal Reserve Chairman Kevin Warsh's eagerness to avoid signaling the direction of interest rates has obscured another piece of information that is equally crucial to investors, analysts and other policymakers: how he will respond when the economy faces challenges. Warsh will appear before Congress for hearings on Tuesday and Wednesday. Market participants will be watching closely for his views on inflation, the job market and economic growth, and how he sees those factors relating to interest rate policy. But if his recent public remarks are anything to go by, they may still be hard-pressed to get a clear answer. In addition to "forward guidance," another term that has come up frequently recently is "reaction function," a concept used by Waller and several economists. Although the term is quite technical, it is at the heart of the current discussion. Economists believe that it is necessary to clearly distinguish between the two concepts. As Andrew Sacher of Economic Research explained: “Forward guidance tells the market what policy path the central bank is expected to follow; the reaction function tells the market how the central bank will respond to various unexpected situations without revealing the policy path in advance. Many, including Waller, agree that Warsh's view that excessive forward guidance could tie policymakers' hands by misleading the market into thinking the Fed has made a commitment to future interest rate decisions is legitimate. But if he delays clarifying his reaction function to the outside world, he may also bring another serious risk. Pricing in financial markets, especially key benchmarks such as the 10-year U.S. Treasury yield and the Secured Overnight Financing Rate (SOFR), depends in part on investors' expectations of the central bank's future policy behavior. If the market can accurately understand the logic of the central bank's policy response, investors can combine their own judgments of economic trends to more reasonably predict the possible direction of interest rates. If these forecasts are broadly accurate, they could not only help reduce market volatility but could also shorten the time it takes for interest rate adjustments to have an impact on the economy. “Good communication should convey the Fed’s response function, which is the relationship between economic conditions and the path of policy rates. That's what really matters. Richard Berner, who worked in the Federal Reserve's research department in the 1970s and is now a professor at New York University, said, "This is two different things from forward guidance." It is recommended to buy 2-year to 5-year US Treasury bonds Interest rate strategists at Société Générale recommend gradually building long positions in 2- to 5-year U.S. Treasury bonds on the grounds that "short-end yields are close to the highs of the year and the holding income is still attractive." The yield on 2- to 5-year U.S. Treasury bonds rose to a new high in 2026 on Monday as the collapse of the U.S. ceasefire agreement on the Iran war last week triggered the latest surge in oil prices. "Although geopolitical risks may persist, yields near the high end of their recent range may attract investors to gradually build long positions," Societe Generale strategist Subadra Rajappa and others said in a July 9 report. Major Wall Street banks will release intensive financial reports. UBS expects Goldman Sachs' financial results and JPMorgan Chase's successor to be the focus. UBS analyst Erika Najarian said that Goldman Sachs faces the biggest test in this round of financial reports. It is not easy to stand out among the major banks on Wall Street; at the same time, investors are focusing on who may succeed Jamie Dimon as CEO of JPMorgan Chase.
Najarian said on Monday, "Given market expectations and investor positions, Goldman Sachs faces the biggest test." Najarian said that five of the six largest U.S. banks will report results on Tuesday. "It will not be easy to stand out, especially since I expect JPMorgan Chase's earnings call will largely revolve around the issue of succession." Najarian is an equity research analyst responsible for the large banks and consumer finance sectors at UBS. IMF warns that if debt problem is not solved, Europe may be on a dangerous track The International Monetary Fund (IMF) said that if Europe cannot effectively control its public finances, its sovereign debt situation may seriously deteriorate. A paper released on Monday by IMF economists including Luc Eyraud, Mahika Gandhi and Andrew Hodge pointed out that the piecemeal fiscal response of many European countries is unsustainable at a time when challenges such as population aging, energy transition and strengthening defense are intensifying. Bank of America survey: Global fund managers' bearish sentiment on yen reaches highest level since 2022 Global portfolio managers' bearish sentiment on the yen rose to its highest level in about four years as risks to Japan's fiscal and monetary policy outlook outweighed the possibility of Japanese government intervention in currency markets, a Bank of America survey showed. Bank of America strategists Ralf Preusser, Adarsh Sinha and others wrote in a report on July 10: "Investors' bearishness on the yen exchange rate has reached the highest level since 2022. The main factors driving this view are monetary policy and fiscal policy risks."
Najarian said on Monday, "Given market expectations and investor positions, Goldman Sachs faces the biggest test." Najarian said that five of the six largest U.S. banks will report results on Tuesday. "It will not be easy to stand out, especially since I expect JPMorgan Chase's earnings call will largely revolve around the issue of succession." Najarian is an equity research analyst responsible for the large banks and consumer finance sectors at UBS. IMF warns that if debt problem is not solved, Europe may be on a dangerous track The International Monetary Fund (IMF) said that if Europe cannot effectively control its public finances, its sovereign debt situation may seriously deteriorate. A paper released on Monday by IMF economists including Luc Eyraud, Mahika Gandhi and Andrew Hodge pointed out that the piecemeal fiscal response of many European countries is unsustainable at a time when challenges such as population aging, energy transition and strengthening defense are intensifying. Bank of America survey: Global fund managers' bearish sentiment on yen reaches highest level since 2022 Global portfolio managers' bearish sentiment on the yen rose to its highest level in about four years as risks to Japan's fiscal and monetary policy outlook outweighed the possibility of Japanese government intervention in currency markets, a Bank of America survey showed. Bank of America strategists Ralf Preusser, Adarsh Sinha and others wrote in a report on July 10: "Investors' bearishness on the yen exchange rate has reached the highest level since 2022. The main factors driving this view are monetary policy and fiscal policy risks."