Walsh's Hearing Debut Signals New Policy Approach: Emphasizes High Inflation Zero Tolerance but No Rate Path Hints

Original Author: Li Dan

Original Source: Wall Street CN

Federal Reserve Chair Walsh's debut congressional monetary policy hearing unveiled his "New Fed Policy Manifesto." Without giving the market the most anticipated signal of a rate cut or hike, he instead repeatedly emphasized restoring price stability and safeguarding Fed independence, and pledged that future balance sheet adjustments would be communicated well in advance.

Nick Timiraos, a journalist known as the "New Fed Whisperer," believes Walsh deliberately avoided hinting at the future rate path on that day, instead focusing the hearing on reiterating the Fed's long-term goal of controlling inflation.

Just before the hearing began, the US June CPI came in below market expectations, which had initially pushed the market to further bet on faster policy easing by the Fed. However, Walsh downplayed the significance of this data, stating he did not believe the inflation task was complete.

Timiraos pointed out that Walsh did not use this inflation data to signal any future policy inclination, nor did he reveal the rate path for the July FOMC meeting or beyond. 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 price stability goal.

Bloomberg believes that the multi-hour hearing essentially outlined the policy framework of the "New Fed": insisting on monetary policy independence, adhering to the 2% inflation target, rejecting the notion that the Fed must choose between employment and inflation, while leaving room for future balance sheet reform and central bank governance reform.

Influenced by Walsh's somewhat hawkish remarks, US Treasury yields pared some of the decline seen after the CPI release during his testimony, and the US Dollar Index narrowed its post-CPI drop by about half.

Five Signals: Walsh's First Congressional Hearing Outlines the 'New Fed' Policy Framework

Reiterating 'Zero Tolerance' for Persistent High Inflation, Asserting One CPI Decline is Insufficient to Declare Victory Over Inflation

Walsh emphasized during the hearing that the Fed has "zero tolerance" for persistent high inflation. He stated that the Fed has failed to achieve its 2% inflation target for several consecutive years, making restoring price stability the most important current policy task.

In response to the June CPI data released that day, which was significantly lower than market expectations, Walsh said, "Some might say 'Mission accomplished,' I don't see it that way."

Timiraos believes Walsh's repeated emphasis on the long-term inflation target, without adjusting his policy stance based on a single month's data improvement, highlights his desire to avoid the market interpreting one inflation reading as a signal of imminent monetary policy shift.

No Rate Path Revealed, Emphasizing Future Decisions Still Data-Dependent

Regarding the next interest rate move, which is of utmost concern to the market, Walsh remained restrained.

Timiraos noted that Walsh did not hint at the policy direction for upcoming FOMC meetings, nor did he answer questions about when rates might adjust. Instead, he emphasized that the Fed possesses both interest rate policy and balance sheet policy tools and will assess whether and how to use them based on future economic data.

However, Walsh also revealed that he would discuss "whether and when to deploy policy tools" with his FOMC colleagues in the coming period, describing it as a potential "family fight."

Bloomberg believes this statement implies that, despite not giving clear policy guidance, Walsh's overall tone remains hawkish, indicating his reluctance to easily signal easing before confirming that inflation is sustainably returning to target.

Employment and Inflation Are Not a 'Cruel Choice'

In response to a lawmaker's question about the Fed's dual mandate, Walsh denied the existence of a so-called "cruel choice."

He stated that once price stability is restored, the US economy can grow sustainably, and businesses can continue to expand hiring. Therefore, controlling inflation and achieving maximum employment are not in conflict but mutually reinforcing.

This statement further reinforces his policy philosophy: stable prices themselves are the foundation for long-term employment growth and economic prosperity.

Balance Sheet Reform Will Be Pre-Announced, No Sudden Market Shocks

Balance sheet reform has been a key reform agenda since Walsh took office.

However, during this hearing, he said he would not prejudge the conclusions of the balance sheet reform working group currently undertaking work.

At the same time, he pledged that if the Fed were to adjust its balance sheet policy in the future, it would communicate fully with the market in advance to ensure investors have ample warning and avoid sudden actions.

Walsh reiterated that the Fed's balance sheet should serve monetary policy, not fiscal policy functions.

Reuters believes this statement helps alleviate market concerns that the new round of balance sheet runoff reform might proceed too quickly, and signals that the Fed will place greater emphasis on policy communication and market expectation management in the future.

Insisting on Monetary Policy Independence, Receiving Positive Bipartisan Responses

Facing questions from lawmakers, Walsh reiterated that the Fed will maintain independence in formulating monetary policy, pledging that interest rate setting will not be influenced by political factors.

Bloomberg reported that although Walsh received almost no Democratic support during his Senate confirmation process, several Democratic lawmakers at this hearing praised his stance on maintaining central bank independence.

Veteran congressional reporter Steve Dennis believes that against the backdrop of Trump's continuous public pressure on the Fed to cut rates, some Democratic lawmakers choosing to publicly support Walsh's position on defending central bank independence also reflects subtle changes on this issue between the two parties.

Walsh's Hearing Reinforces a Data-Dependent Policy Communication Framework

How did the market view Walsh's hearing? Overall, Walsh's remarks did not alter the short-term interest rate outlook but reinforced a new communication framework based on "data-dependent policy."

Timiraos believes the biggest characteristic of Walsh's hearing was not the release of new policy signals, but the deliberate omission of any signal regarding the rate path.

Faced with a CPI report that came in below expectations, Walsh did not take the opportunity to discuss whether to cut rates next, nor did he provide any forward guidance. Instead, he consistently centered his remarks on restoring price stability, Fed independence, and policy tools, continuing the communication style he has adopted since taking office of avoiding commitments based on single data points or single meetings.

Bloomberg believes the hearing further outlined the policy tone of the Fed under Walsh's leadership: continuing to prioritize price stability while simultaneously advancing balance sheet and central bank governance reforms, and managing market expectations through 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 focus more on how Walsh translates this philosophy into actual FOMC decisions in the coming months.