Wash’s Testimony Debut Signals New Policy Direction: Emphasizes Zero Tolerance for High Inflation but Offers No Clues on Rate Path

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." He avoided giving the market the most-watched signals on rate cuts or hikes, instead repeatedly emphasizing restoring price stability and maintaining the Fed's independence, while pledging that future balance sheet adjustments will be communicated well in advance.

Nick Timiraos, the journalist known as the "New Fed Whisperer," believes Walsh deliberately avoided hinting at the future path of interest rates, 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, briefly pushing the market to further bet on the Fed easing policy more quickly. 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 release any future policy leaning, nor did he reveal the rate path for the July FOMC meeting or beyond. Instead, he insisted on emphasizing that the Fed has two policy tools – interest rates and the balance sheet – and will decide how to use these tools based on economic data going forward to achieve the price stability goal.

Bloomberg believes this multi-hour hearing effectively outlined the "New Fed's" policy framework: adhere to monetary policy independence, stick to the 2% inflation target, reject the notion that employment and inflation are a binary choice, while leaving room for future balance sheet reform and central bank governance reform.

Influenced by Walsh's relatively hawkish remarks, US Treasury yields retraced some of their post-CPI declines during his testimony, and the US Dollar Index narrowed roughly half of its post-CPI drop.

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

Reiterates Zero Tolerance for Persistently High Inflation, Declares One CPI Decline Insufficient to Declare Victory Over Inflation

Walsh emphasized during the hearing that the Fed has "zero tolerance" for persistently high inflation. He stated that the Fed has failed to meet its 2% inflation target for years, therefore restoring price stability remains the most important policy task today.

Facing the significantly lower-than-expected June CPI data released that day, Walsh said: "Some might say 'Mission accomplished.' I don't see it that way."

Timiraos believes Walsh's repeated reiteration of the long-term inflation target, without adjusting policy stance based on a single month's data improvement, highlights his desire to prevent markets from interpreting one inflation data point as a signal of imminent monetary policy pivot.

Did Not Reveal Any Rate Path, Emphasized Future Actions Will Still Be Data-Dependent

Regarding the next steps on interest rates, which the market cares about most, Walsh remained restrained.

Timiraos noted that Walsh did not hint at the policy direction for future FOMC meetings, nor did he answer questions about when rates might be adjusted. Instead, he emphasized that the Fed has two policy tools – interest rates and the balance sheet – and will judge whether and how to use these tools based on future economic data.

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

Bloomberg believes this statement implies that, although Walsh did not provide clear policy guidance, his overall wording remains relatively hawkish, showing reluctance to easily signal easing before confirming inflation is sustainably returning to target.

Employment and Inflation Are Not a "Cruel Choice"

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

He stated that as long as 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 conflicting but mutually reinforcing.

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

Balance Sheet Reform Will Be Pre-announced, Avoid Sudden Market Shocks

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

However, during this hearing, he stated he would not prejudge the conclusions of the working group tasked with balance sheet reform.

At the same time, he pledged that if the balance sheet policy is adjusted in the future, the Fed will communicate fully with the market in advance, ensuring investors have adequate expectations and avoiding sudden actions.

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

Reuters believes this statement helps alleviate market concerns about the potentially too-rapid pace of the new round of balance sheet reduction reform, and also implies the Fed will place greater emphasis on policy communication and market expectation management in the future.

Upholds Monetary Policy Independence, Receives Positive Responses from Some Bipartisan Lawmakers

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

Bloomberg reports that although Walsh received almost no Democratic support during his Senate confirmation process, several Democratic lawmakers gave positive assessments of his stance on defending central bank independence during this hearing.

Veteran congressional reporter Steve Dennis believes that against the backdrop of Trump's continued public pressure on the Fed to cut rates, some Democratic lawmakers choosing to publicly support Walsh's defense of central bank independence also reflects subtle cross-party shifts on this issue.

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

What does the market think of Walsh's hearing? Overall, Walsh's remarks did not change the short-term interest rate outlook but strengthened the new communication framework of "data-dependent policy."

Timiraos believes the biggest characteristic of Walsh's hearing was not releasing new policy signals, but deliberately releasing no signals regarding the interest rate path.

Facing a lower-than-expected CPI report, Walsh did not seize the opportunity to discuss next steps on rate cuts, nor did he provide any forward guidance. Instead, he consistently elaborated around restoring price stability, Fed independence, and policy tools, continuing his communication style 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: continue to prioritize price stability, simultaneously advance balance sheet and central bank governance reforms, and manage 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. The market will also focus more on how Walsh translates this philosophy into actual FOMC decisions in the coming months.