Written by: Rita

Federal Reserve Chairman Warsh's hawkish speech at Jackson Hole caused the market to reprice the likelihood of a rate hike in September, while Governor Waller's dovish remarks later that week sent a completely different signal. Warsh borrowed from the interest rate hike styles of former Vice Chairman Kohn and former Chairman Bernanke, posing the question: "Is today a Kohn day or a Bernanke day?" The Bernanke path involves slow, preemptive rate hikes, while the Kohn path involves waiting longer and responding more quickly and aggressively if inflation worsens. Bank of America pointed out in its Global Economic Weekly published on September 4 that this creates a communication paradox. To restore the credibility damage from the July press conference, Warsh was forced to provide more directional guidance than expected. Waller, without such a burden, was able to describe his state-dependent policy rules more accurately.

Bank of America believes that Warsh's hawkish stance essentially tells the market that the default path has shifted to the Kohn trajectory. He did not make a formal commitment to raising interest rates but provided more directional guidance than his communication philosophy would suggest.

More transparency means less commitment

The core lesson of this communication game is that the clearer the rules are explained, the less guidance is needed for the market to choose which path to take. Warsh is actually suggesting that the Fed may have waited too long, so it should be prepared for the Kohn path. Waller, however, is saying, "This is the roadmap; if conditions remain good, take the Bernanke path; if they worsen, take the Kohn path."

The first tells the market which path is more likely to occur. The second tells the market how the Fed will choose between the two paths. The difference in communication styles stems from "how much skin is in the game." As chairman, Warsh must repair the credibility lost from the July communication missteps and is compelled to provide stronger directional guidance. Waller, as a governor, does not have this burden and can describe conditions more freely.

Bank of America’s judgment is clear. Warsh, under the guise of repairing credibility, ultimately provided more forward guidance. Waller, under the premise of describing conditions, actually gave the market less information about the interest rate path. The tension between the two is key to understanding the current communication dilemma of the Fed.

$40 trillion in debt is not the driver of rising yields

The total U.S. national debt has surpassed $40 trillion, but Bank of America believes this is merely a milestone at the numerical level. The market's reaction to the absolute value of debt levels is limited; what truly drives yields are expected changes in fiscal deficits and the rhythm of debt issuance.

Crossing the $40 trillion threshold itself is not the catalyst for the recent rise in long-term yields. What is truly concerning is interest expenditure. Interest expenditures by the U.S. federal government have exceeded defense and healthcare spending, currently accounting for 3.5% of GDP. Current market rates are far above the weighted average rates of outstanding debt, and as the debt matures, interest expenditures will continue to rise.

Bank of America simulated three scenarios: for every 1 percentage point increase in the debt-to-GDP ratio, interest rates could rise by 1, 2, or 3 basis points, respectively. The initial impact is moderate, but the long-term paths diverge significantly. The debt-interest-debt feedback loop is a slow but continuously accumulating process, not an immediate risk.

European Central Bank: September rate hike of 25 basis points may be the last

Bank of America expects the European Central Bank to raise rates by 25 basis points in September, bringing the deposit rate to 2.50%. Based on assumptions from mid-August, inflation forecasts have changed little, suggesting a possibility of a third rate hike this year, but with no commitment. Bank of America believes that after the September hike, the European Central Bank will have completed this tightening cycle and will turn to rate cuts in 2027.

Energy prices are the biggest uncertainty. If calculated based on energy prices as of September 1, 2027 synthetic energy prices will be nearly 5% higher than the June benchmark. If the European Central Bank displays in an alternative scenario that core inflation in 2027 and terminal core inflation are 10 basis points higher than the June benchmark, the market will interpret this as a signal of increased likelihood for a December rate hike. Bank of America still believes that the threshold for a total rate hike of 75 basis points is very high and requires continued increases in energy prices to be realized.

UK: Economy remains resilient under energy shock

Bank of America has slightly raised its 2026 growth forecast for the UK to 1.2%, reflecting stronger-than-expected economic performance in the first half. The 2027 growth forecast has been lowered to 1.2% due to high energy prices and uncertainty about policies ahead of the autumn budget. The peak inflation is expected to occur in November at 3.5%, higher than previous forecasts.

Bank of America expects the Bank of England to remain on hold in 2026 and cut rates by 25 basis points to 3.50% in November 2027. The uncertainty of the energy shock means that the risk of rate hikes still exists, making the meetings in November, December, and February "live." Bank of America believes the market has priced in the last three rate hikes too hawkishly.

Philippines and Emerging Markets: Widening fiscal deficits and policy differentiation

The Philippines' fiscal deficit may widen to 6.1% of GDP in 2026, higher than the government's previous expectation of 5.5%. This is mainly due to slower revenue growth (expected at 6%, with the government forecasting 8%) and slower GDP growth (2.5% vs the government's forecast of 3.5% to 4.5%). Interest payments are consuming an increasing share of the budget, expected to account for 15% of the budget in 2026, the highest since 2014.

In Central and Eastern Europe, the gas price shock poses a real risk, and the market's pricing of rate hikes may be overly high. The transmission of gas prices to consumers is slow and uneven, with a lag of 6 to 12 months, and significant differences among countries. The Czech Republic is most affected by wholesale gas prices, followed by Poland, while Hungary and Romania are protected due to administrative pricing. Bank of America expects the Czech central bank to hike rates at most one more time (in November, by 25 basis points), while the Polish central bank will keep rates unchanged.

Bank of America's global outlook presents a clear picture. The U.S. swings within a communication paradox as the debt trajectory slowly deteriorates. Europe is on the threshold of its final rate hike. The UK is waiting amid the energy shock. Emerging markets face their own structural constraints. This is a global economic landscape without a unified theme; differentiation is the main line.

Disclaimer

This article is an organization and interpretation of a third-party securities research report (Bank of America Securities, September 4, 2026) by Chao Xiang Research, combined with public market information. The ratings, target prices, earnings forecasts, and related judgments cited in the text are the opinions of the analysts from that brokerage, representing only their institution's stance, not the opinion of Chao Xiang Research, nor do they constitute any investment advice.

The market has risks, and decisions should be made independently. This article should not be used as a basis for buying or selling any securities.