Author: qinbafrank
The market is still pricing in a 40% probability of a rate hike by Walsh at Thursday's early morning rate decision, a scenario not often seen in the past. Why? The core reason is naturally the "data-dependence + low communication" under Walsh's new framework.
Since taking office in 25th month, Walsh has explicitly promoted communication and framework reforms: 1) significantly shortened statements, removed traditional forward guidance language (no longer hinting at easing or tightening bias), emphasizing "statements give only facts";
2) established five working groups on communication, balance sheet, data sources, productivity & employment, and inflation framework to systematically review existing practices.
3) strongly reiterated the commitment to "delivering price stability," expressed "zero tolerance" for persistently high inflation (inflation has been above the 2% target for over 60 consecutive months), and downplayed the employment trade-off language within the dual mandate.
He himself does not submit a personal dot plot prediction and stated that markets should price more based on their own interpretation of the data, rather than "reflecting" the Fed's views. The result is that the market has lost the "anchor" of being guided as before. During the Powell era, officials' speeches, statement wording, and the dot plot would align expectations in advance, with probabilities converging highly as meetings approached.
Now the policy path is more "real data-driven + potentially sudden action," forcing markets to price in the possibility of surprise rate hikes on their own, especially during the new chair's credibility-building phase. This directly pushes up short-term rate volatility and tail risk premiums—the bond market (federal funds futures) pays a protection cost for the scenario "in case inflation risks suddenly worsen and the committee chooses immediate action to reinforce the signal." This actually brings higher risk premiums and volatility, not a smoother path.
Although from a personal perspective, a decision to hold rates steady is most likely this time, as mentioned in a morning tweet, tail risks cannot be ignored. Because there are also specific catalysts supporting high uncertainty in the current environment:
1) Iran Conflict and Energy Prices
U.S.-Iran tensions are fluctuating (threats to the Strait of Hormuz, strikes, and interim agreement reversals), causing volatile oil prices, directly pushing up inflation tail risks. Even though June CPI was softer than expected, markets still worry about energy feeding into core and services, or conflict escalation forcing a faster Fed response. Oil prices and rate hike probabilities have been highly correlated recently.
2) New Chair Credibility and Signaling Needs
Walsh's first meeting was already hawkish-leaning (concise statements, emphasizing price stability). Markets worry he might choose "early action" to establish his anti-inflation resolve, especially while data still carries upside risks. Lack of guidance means the "live meeting" attribute is stronger, leading to higher pricing of tail risks (surprise hike).
Simply put, this 40% rate hike probability stems from the substantial weakening of forward guidance under the new chair Walsh's framework, combined with geopolitical and data uncertainty. The market is paying for protection against tail risks, not treating a hike as the baseline scenario.
All current analyses are projections and probabilities; ultimately, we must see what happens at Thursday's early morning rate decision.
Also pay attention to the statement wording (whether it's further streamlined or reiterates price stability) and Walsh's press conference stance (he may continue to give little guidance).
1) If rates are held steady, markets may breathe a sigh of relief and quickly shift focus to September, continuing to watch subsequent data (jobs, inflation, oil).
2) If there is a surprise hike, it would reinforce the narrative of "data + credibility first" under the new framework. Markets would further revise up the rate path and rapidly reprice "higher for longer," naturally leading to tighter financial conditions. Risk assets would continue to face pressure.
One could say this pricing itself reflects the market adaptation process under the new communication paradigm.
