Written by: Li Jia, Wall Street Journal

After Federal Reserve Chairman Waller's first press conference, market doubts about the Federal Reserve's determination to fight inflation are rising. Bank of America Securities warned in its latest report that monetary policy resembles the "Anna Karenina principle"—success requires multiple conditions to be met simultaneously, and the failure of any one key link could jeopardize the price stability goal.

After the Federal Reserve voted 9 to 3 to keep interest rates unchanged, Waller did not provide a sufficiently clear policy explanation, instead emphasizing that the market has replaced part of the rate hike effect through tighter financial conditions. This statement prompted the market to reprice: long-term yields rose, the yield curve steepened, inflation breakeven rates increased, and the dollar weakened, reflecting typical market reactions under pressure on central bank credibility.

Bank of America believes that if inflation data in the coming weeks does not provide clear dovish support, a rate hike in September may no longer just be a policy choice, but a necessary action to regain market trust and restore policy credibility.

Waller's Statement Sparks Market Doubts: Is the Federal Reserve Passively Following the Market or Actively Anchoring Inflation?

Waller's statements at the press conference sent out mixed signals. On one hand, he believes that financial markets have actively tightened financial conditions, so the Federal Reserve does not need to achieve the same effect through further rate hikes; on the other hand, he hinted that more inflation indicators might be referenced and that tools other than rate hikes could be considered to address price pressures.

Bank of America pointed out that the issue is that Waller's policy logic differs from traditional central bank communication frameworks.

The "Maradona Interest Rate Theory" proposed by former Bank of England Governor Mervyn King suggests that central banks guide the market to tighten financial conditions in advance by setting policy expectations, thereby reducing their own rate hike pressures. In contrast, Waller's statements are closer to another logic: the market adjusts interest rates on its own, and the Federal Reserve only needs to observe and follow.

However, Bank of America believes this logic carries risks. Because a rise in long-term rates does not necessarily mean that financial conditions are genuinely tightening; it could also reflect market repricing for higher fiscal deficits, stronger economic growth, higher risk premiums, or higher inflation expectations.

Market movements after the press conference reflect this concern: rising long-term real rates, widening inflation breakeven rates, and a further steepening of the yield curve indicate that investors are beginning to doubt whether the Federal Reserve can maintain a long-term inflation anchor.

Moderate Employment Growth Supports Soft Landing, Strengthening Rate Hike Basis for September

Bank of America expects that the U.S. non-farm employment will increase by 80,000 in July, slightly below market expectations, but private sector employment is expected to increase by 95,000, surpassing June's 49,000.

The report believes that the current labor market does not show obvious signs of deterioration. Initial jobless claims remain moderate, and employment growth continues. Although seasonal summer factors, weak ADP employment data, and slowing local government hiring pose risks, the overall trend still supports an economic soft landing.

In terms of the unemployment rate, Bank of America expects it to rise from 4.2% in June to 4.3%, mainly due to the rebound in the labor force participation rate. Regarding wages, July's average hourly earnings are expected to grow by 0.3% month-on-month, with year-on-year growth remaining around 3.5%, showing no significant inflation pressures.

Bank of America believes that if employment data meets expectations, it would mean a fifth consecutive month of non-farm growth, with the private sector adding an average of about 89,000 jobs per month in 2026, further reducing the downside risks in the labor market.

In the context of resilient employment and persistently sticky inflation, Bank of America argues that the rationale for last year's rate cut cycle is weakening, while the policy basis for a rate hike in September is strengthening.

Under the "Anna Karenina Principle," the Federal Reserve Faces Credibility Test

Bank of America borrows the classic opening of Tolstoy's "Anna Karenina," along with the "Anna Karenina Principle" proposed by economist Jared Diamond, to explain the current predicament faced by the Federal Reserve. This principle suggests that success requires the simultaneous satisfaction of multiple necessary conditions, while failure often only requires the absence of one key condition.

For monetary policy, achieving price stability requires not only interest rate tools but also the joint action of central bank credibility, stable inflation expectations, coordinated fiscal policy, and a stable financial system.

Bank of America points out that monetary policy is not merely a mathematical model but an art that relies on communication. The core task of the central bank's press conference is to make the market understand its policy response function; if this fails, uncertainty will shift to the market, potentially leading to the decoupling of inflation expectations.

The problem with Waller's press conference was the lack of a clear explanation of how the Federal Reserve would balance growth, employment, and inflation moving forward.

Bank of America believes the Federal Reserve still has the opportunity to regain control over the market narrative, and the September meeting will be a critical juncture. If future data cannot prove that inflation is rapidly declining, an interest rate hike could become an important step for the Federal Reserve to restore its credibility and re-establish policy anchoring.