Original Author: Zhao Ying
Original Source: Wall Street News
Federal Reserve Chairman Kevin Walsh's hawkish posture might be nothing more than an elaborately designed smokescreen.
In a recent report, Academy Securities analyst Peter Tchir suggests that while the market has currently priced in a 75% probability of a September rate hike and expects a cumulative 1.25 hikes by year-end, it is missing the real path leading to a September rate cut—a path perhaps being quietly laid by Walsh himself.
Tchir points out that Walsh has sent a clear enough signal: suppressing tail-end risks in long-term interest rates through hawkish rhetoric (the 10-year Treasury yield has retreated from 4.46% to 4.37% this week), while reserving space for a subsequent narrative shift based on data. In his view, the end point of this series of maneuvers could be a rate cut in September, another in October, landing just in time before the midterm elections.
This judgment remains a personal opinion for now, and Tchir himself acknowledges its uncertainty. Yet his line of argument is tightly knit, covering the redefinition of inflation data, the battle for narrative control over the neutral rate, and the core premise that the White House's policy goals have never changed.
Hawkishness Just an Act? Political Logic Points to Rate Cuts
The starting point of Tchir's argument is a political-economic interpretation of Walsh's motivations.
He believes the policy objectives of the Trump administration have never fundamentally shifted. The President himself has repeatedly stated his deep understanding of real estate and the importance of low interest rates to the property market. Against this backdrop, it's difficult to imagine Trump being satisfied with his own appointed Fed chairman maintaining a persistently hawkish stance—unless this is itself a negotiated strategy.
Tchir paints a hypothetical scenario: Walsh convinces Trump that sending dovish signals now would be disastrous. Letting him appear hawkish can cap long-term yields, maintain the appearance of Fed independence, while simultaneously pushing Wall Street analysts and the media fully towards hike expectations. Then, as data gradually "cooperates," pivot to rate cuts under the "data-dependent" rationale, and conveniently blame the inflation problem on the previous Fed "using wrong data and acting too late."
He adds that Walsh's father-in-law is a major donor to Trump, a background perhaps not entirely irrelevant.
Taking Aim at Inflation Data: PCE Isn't This Fed's Yardstick
The most substantive part of Tchir's argument is his systemic questioning of the current inflation measurement framework.
He explicitly states, PCE is not the preferred inflation gauge for Walsh's Fed. He believes PCE was more of a Bernanke-era preference, and Walsh does not lose sleep over PCE data at night.
His criticism is particularly sharp regarding the measurement of housing inflation. The "Owners' Equivalent Rent" (OER) in CPI didn't peak until mid-2023, reaching about 8%; whereas Zillow's rental data hit a high near 16% as early as early 2022. He points out that the Cleveland Fed has already developed the "New Tenant Repeat Rent" (NTRR) index, whose trend closely aligns with Zillow's, yet this more realistic indicator has received almost no attention.
His conclusion: The Fed could entirely, without introducing external data, shift to using the indicators developed by the Cleveland Fed itself, thereby providing a data-based justification for rate cuts.
Truflation and "Two-Point-Something Is Good Enough"
Beyond PCE, Tchir also cites Truflation's real-time inflation data. According to his introduction, Truflation constructs a daily inflation index based on massive real-time datasets, with its core inflation rate currently around 1.45%, consistently below 1.8% since February this year.
He also notes that Walsh's recent remarks hinted that the "big number" (the integer) of the inflation figure is more important than the precise value. Tchir infers from this that the market may be gradually being "conditioned"—to accept the cognitive framework that "two-point-something" is equivalent to approaching the 2% target. He marks the inflation target line on his chart as 2.9%, not the traditional 2%.
He believes that once the data narrative is switched, the technical barriers to rate cuts will significantly lower.
Tchir also mentions the work of former Fed insider Miran on the neutral rate issue. He believes that while no one in the market is discussing the neutral rate currently, this topic will resurface at an opportune moment.
His logic is: The neutral rate itself is difficult to measure precisely, with a substantial estimation range. If the new Fed leadership can argue that the previous judgment on the neutral rate was too high, then this alone could provide theoretical grounds for 50 to 100 basis points of rate cuts, while assigning blame to the "old Fed's error."
Apple Price Hikes and AI Inflation: Rate Hikes Are Aiming at the Wrong Target
Addressing market concerns about AI-driven inflation, Tchir offers a counter-interpretation.
He points out that Apple (AAPL)'s stock fell after announcing recent price hikes, a market reaction that precisely shows consumer tolerance for price increases is being questioned. If a top consumer brand like Apple struggles to have its price hikes digested by the market, the pricing power of ordinary consumer goods companies would only be weaker—contradicting the narrative of persistent inflation heating up.
He also cites feedback from a chip company: memory prices have not surged due to AI demand, with some products even cheaper than five years ago. He believes that AI and data center construction spending are indeed inflationary, but this is a completely different dimension from the affordability issues faced by ordinary consumers.
More critically, he argues that rate hikes have almost no dampening effect on AI/data center spending—those tech companies trading at 100x multiples are completely insensitive to a 50-basis-point rate move. Those truly hurt by rate hikes are ordinary borrowers with no connection to AI inflation.
Based on the above judgments, he believes the market will begin to reprice rate cut expectations, with the most certain opportunity lying in the short end of the yield curve—going long on short-term Treasuries, betting on lower front-end yields. For the long end, he maintains a neutral to slightly bullish stance, believing Treasury Secretary Bessent wants the 10-year yield back in the "3-handle," and Walsh has already removed tail-end risks for the long end through hawkish rhetoric.
In the equity space, he recommends a significant overweight in the energy sector, especially global nuclear power assets; within the Defense & Security (ProSec) theme, overweight biotech/pharmaceuticals and underweight chips. He is cautious on AI and data center valuations and warns that potential secondary issuance pressure from large tech companies could weigh on their stock prices.
