Five signals from Walsh's "debut" at the congressional monetary policy hearing.

By: Li Dan, Wall Street Journal

Federal Reserve Chairman Walsh’s "debut" at the congressional monetary policy hearing showcased his "Federal Reserve New Policy Declaration," which did not provide the most concerning signals for the market regarding interest rate cuts or hikes. Instead, he repeatedly emphasized restoring price stability, maintaining the independence of the Federal Reserve, and promised future adjustments to the balance sheet would be communicated well in advance.

Journalist Nick Timiraos, known for the "New Federal Reserve News Agency," stated that Walsh deliberately avoided making any hints about the future interest rate path that day, instead focusing the hearing on reiterating the Federal Reserve's long-term goal of controlling inflation.

Just before the hearing began, the U.S. released June CPI data that fell below market expectations, temporarily pushing the market to bet that the Federal Reserve would loosen policy more quickly. However, Walsh downplayed the significance of this data, stating that he does not believe the inflation task has been completed.

Timiraos noted that Walsh did not use the inflation data to signal any future policy inclinations, nor did he disclose the rate path for the July meeting or thereafter. He insisted that the Federal Reserve has two policy tools—the interest rate and the balance sheet—and will decide how to use these tools based on economic data to achieve the price stability goal.

Bloomberg believes that this multi-hour hearing actually outlines the policy framework of the "New Federal Reserve": insisting on the independence of monetary policy, adhering to the 2% inflation target, rejecting the notion that employment and inflation can only be a cruel choice, while also leaving room for future balance sheet reforms and central bank governance reforms.

Influenced by Walsh’s hawkish speech, U.S. Treasury yields retraced some of the declines made after the CPI announcement during Walsh's hearing, and the dollar index narrowed about half of its drop following the CPI release.

Five signals: Walsh's first congressional hearing outlines the "New Federal Reserve" policy framework

Reiterating "zero tolerance" for persistently high inflation, asserting that a single CPI drop is insufficient to declare victory over inflation

Walsh emphasized at the hearing that the Federal Reserve has "zero tolerance" for persistently high inflation. He said that the Federal Reserve has failed to achieve the 2% inflation target for several consecutive years, thus restoring price stability remains the most important policy task at present.

In response to the June CPI data released that day, which was significantly lower than market expectations, Walsh stated: “Some may say, (the inflation) task is completed (Mission accomplished), I do not see it that way.”

Timiraos believes that Walsh repeatedly reiterated the long-term inflation target that day, and did not adjust his policy stance based on a single month’s data improvement, highlighting his desire to avoid the market interpreting one inflation data release as a signal that monetary policy is about to shift.

Not disclosing any interest rate path, stressing that future actions will still depend on data

Regarding the market's most concerned question about the next rate actions, Walsh remained restrained.

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

However, Walsh also revealed that in the near future, he will discuss "whether and when to use policy tools" with FOMC colleagues and described that there might be a "family fight" during those discussions.

Bloomberg believes this statement indicates that, although Walsh did not provide clear policy guidance, his overall wording remains hawkish, showing his unwillingness to easily release easing signals before confirming that inflation has consistently returned to the target.

Employment and inflation are not a "cruel choice" of either/or

In response to congressional questions about the Federal Reserve's dual mission, Walsh denied the existence of a so-called "cruel choice."

He stated that as long as price stability is restored, the U.S. economy can continue to grow, and businesses can continue to expand hiring. Thus, controlling inflation and achieving full employment are not in conflict but mutually reinforcing.

This statement further reinforces his policy philosophy that price stability itself is the foundation for achieving long-term job growth and economic prosperity.

Balance sheet reforms will be communicated in advance, not a sudden market shock

Balance sheet reform has been an important reform topic since Walsh took office.

However, at this hearing, he stated that he is unwilling to predict the conclusions of the ongoing work group for balance sheet reform.

At the same time, he committed that if adjustments to the balance sheet policy are made in the future, the Federal Reserve will communicate fully and in advance with the market to ensure that investors have ample expectations and will not take sudden actions.

Walsh reiterated that the Federal Reserve's balance sheet should serve monetary policy and not take on the role of fiscal policy.

Reuters believes that this statement helps alleviate market concerns about a new round of balance sheet reduction possibly advancing too quickly, also indicating that the Federal Reserve will place greater importance on policy communication and market expectation management in the future.

Insisting on the independence of monetary policy, receiving positive responses from some bipartisan members

In response to congressional questions, Walsh reiterated that the Federal Reserve will maintain independence in formulating monetary policy, promising that interest rate setting will not be influenced by political factors.

Bloomberg reported that although Walsh received almost no support from Democrats during his Senate confirmation process, several Democratic members gave positive evaluations of his stance on emphasizing central bank independence at this hearing.

Veteran congressional reporter Steve Dennis believes that against the backdrop of Trump continuously pressuring the Federal Reserve for rate cuts, some Democratic members choosing to openly support Walsh in maintaining central bank independence reflects a subtle change in both parties on this issue.

Walsh's hearing strengthens the communication framework of data-driven policy

How does the market view Walsh's hearing? Overall, Walsh's remarks did not change the short-term interest rate outlook but reinforced a new communication framework of "data drives policy."

Timiraos believes that the biggest characteristic of Walsh's hearing was not releasing new policy signals but deliberately not releasing any signals about the interest rate path.

In response to lower-than-expected CPI data, Walsh did not discuss whether to cut rates next but did not provide any forward guidance. Instead, he focused on restoring price stability, the independence of the Federal Reserve, and policy tools, continuing his communication style of avoiding commitments based on single data points or meetings since taking office.

Bloomberg believes that the hearing further outlines the policy tone of the Federal Reserve under Walsh's leadership: continuing to prioritize price stability while advancing balance sheet and central bank governance reforms, and managing market expectations through more transparent communication.

For investors, this means that future Federal Reserve policies will increasingly rely on data performance rather than pre-set interest rate paths, and the market will pay closer attention to how Walsh implements this philosophy into the FOMC's actual decision-making in the coming months.