Is Waller's "jawboning" failing? Behind the bond market shake-up: investors bet the Fed doesn't dare to really raise rates

Odaily Finance APP has noted that some bond investors from institutions such as ABN AMRO Investment Solutions and Brandywine Global Investment Management have expressed skepticism regarding the growing market speculation that "Federal Reserve Chair Kevin Walsh is about to raise interest rates."

After Walsh reiterated his commitment to curbing inflation in a high-profile speech last Friday, interest rate swap traders now believe that the odds of the Federal Reserve raising rates at its next policy meeting in mid-September exceed 50%. Although the ultimate result will largely depend on this week's employment data and subsequent inflation figures, the yield on the policy-sensitive two-year U.S. Treasury note recorded its largest rise in more than two months.

However, despite the chair’s repeated vows to bring down inflation, his public appearances in recent months have repeatedly sparked market volatility, making some investors apprehensive. They are preparing for the risk that "Walsh will keep rates unchanged again"—as he did in June and July—which further exacerbates concerns about the Federal Reserve’s credibility. It is precisely these concerns that have pushed long-term yields to their highest levels in about two decades. TD Securities stated last Friday that its baseline case is for the Federal Reserve to remain on hold.

For Christophe Bouchet at ABN AMRO, Walsh’s statements weren’t enough to convince him that policymakers would truly take action. He is avoiding long-dated bonds that are particularly vulnerable due to worries that "the Federal Reserve may not be able to control inflationary pressures."

The ABN AMRO Chief Investment Officer said, "Their reaction mechanism remains unclear," and "If Walsh again does not support a September rate hike and inflation stays high, credibility concerns could indeed resurface."

Since Walsh took office in May, investors have been trying to adapt to his communication style—which, compared with his predecessor, provides less forward guidance on policy rates. ING pointed out in a research report last Friday that Walsh "is keen on not providing forward guidance, but his language is nonetheless imbued with the flavor of forward guidance."

At his first press conference as chair in June, his commitment to returning inflation to the Federal Reserve’s 2% target reassured investors who were worried he would cave to U.S. President Trump’s desire for lower rates. Two-year yields climbed sharply and the yield curve flattened.

In July, however, he triggered the opposite reaction, with the yield curve experiencing its most significant steepening since August 2025. Long-term yields rose, as investors said he failed to clearly explain the committee’s decision to keep rates unchanged.

Walsh is influencing the bond market

"All talk and no action"

Tracy Chen, portfolio manager at Brandywine, said Walsh told the bond market what it wanted to hear last week.

"But words are just words," she said, "it’s actions that are convincing."

She maintains an underweight stance on long-term U.S. Treasuries, although she has reduced this position after the U.S. Treasury announced this month that it would "at least double" its planned buybacks of existing 10- to 30-year debt.

Of course, upcoming economic data are critical, especially Friday’s monthly employment report—last week’s data showed that U.S. jobs growth over the past year to March was more moderate than previously reported. Nonetheless, Walsh said the U.S. employment situation is "performing well," and he is more concerned with the price stability part of the central bank’s dual mandate.

In this respect, the weaker-than-expected inflation reports released since the Federal Reserve’s July policy decision have proven the wisdom of staying on hold. Walsh said last Friday that although recent inflation numbers have improved, they are still insufficient to indicate a meaningful trend.

The Fed’s responsibility

George Catrambone, head of fixed income at DWS Americas, said, "There’s a risk the market continues to do the Fed’s job for it, overpricing the odds of rate hikes, and as data softens, the Fed does not deliver, ""The issue isn’t that we’re above the 2% target per se, it’s about which direction the economy is heading."

In his view, recent reports on retail sales and employment have not signaled a renewed acceleration in the economy. U.S. Treasuries appear "quite attractive," he said.

Against a backdrop of uncertainty around the economic outlook and the lack of forward guidance from Walsh as with his predecessor, interest rate swap traders are ramping up hedging for next month, with a roughly 60% probability of a rate hike currently priced in.

Goldman Sachs analysts, including George Cole, said, "In the absence of clearly dovish inflation news, follow-through action will be crucial," and "If September is viewed as a toss-up and the Fed again stands pat without clear explanation, the yield curve is at risk of repeating the moves seen after the July Federal Open Market Committee (FOMC) meeting."

Strategist Edward Harrison stated, "If the Fed does follow through with a rate hike, the continuation of the initial market reaction—a bearish flattening—would be a possible outcome. However, since 30-year yields initially fell in response to Walsh’s hawkish remarks, it suggests the Fed’s credibility is being strengthened. This could ultimately support longer-duration fixed-income assets by driving both real yields and breakeven inflation rates lower."