Federal Reserve Chair Walsh has indicated signs of easing inflation at the European Central Bank forum, stating that recent declines in inflation expectations are early evidence his firm stance is working, while deliberately remaining silent on a potential July rate hike. Internal divisions are also simmering, with 9 of 18 officials supporting a rate increase this year and 8 favoring holding steady. Meanwhile, the White House has publicly opposed further hikes, hinting at political influence, to which Walsh firmly responded: "There will be no change to the Fed's independence."
While attending the ECB forum in Portugal, Fed Chair Walsh signaled an improvement in the inflation outlook but maintained deliberate silence on whether a rate increase is warranted at the July meeting, further complicating market expectations for the central bank's next move.
On Thursday, a noted Fed correspondent reported that Walsh, speaking in Sintra, Portugal, stated inflation expectations have declined over the past four weeks and inflation risks have receded somewhat, viewing this as early evidence that markets are adequately understanding his firm policy stance. He explicitly warned that anyone expecting the Fed to tolerate inflation persistently above its 2% target "will be disappointed."
However, the correspondent noted that Walsh remained strategically vague on tactical details. When pressed on whether a rate hike is appropriate for the July 28-29 meeting, he only expressed a desire for a "healthy family debate" among his colleagues, refusing to give a clear direction. This stance has further increased market uncertainty regarding the Fed's policy path.
Inflation Risks Recede, Yet Policy Path Remains Unclear
The correspondent's analysis suggests Walsh partly attributed recent improvements in inflation to the Iran ceasefire agreement pushing energy prices lower. He also noted that declining interest rate volatility, lower Treasury yields, and a fall in inflation expectations for the next one to two years are all early signs his strategy is working.
Walsh rebutted criticism that the Fed's communication has been opaque. He stated, "I hear people say the markets don't understand, but I think they understand quite clearly." This comment indicates his intent to compress the Fed's forward-looking narrative on the economic outlook to reduce market over-reliance on the policy path.
When asked whether the AI boom could increase inflationary pressures, Walsh again avoided a direct answer, emphasizing that from a longer-term perspective, AI has the potential to expand the economy's productive capacity, thereby easing price pressures. "If firms expand capacity, that would be of great significance to the Fed," he said.
Internal Divergence Evident, Rate Hike Debate Heats Up
The correspondent's view is that clear divisions exist within the Fed regarding policy direction. It was reported that among the 18 officials who submitted forecasts at last month's meeting, 9 believed a rate hike is necessary before year-end, 8 favored holding rates steady, and 1 anticipated a rate cut. Walsh himself, maintaining his usual skepticism toward economic projections, did not submit a forecast.
The Fed has kept the benchmark interest rate unchanged in the 3.5% to 3.75% range this year, following three consecutive 25-basis-point cuts in late 2025. The correspondent believes the current economic landscape has shifted—the labor market has regained strength after a brief slowdown early in the year, with AI investment fervor and stock market gains supporting consumption among high-income groups, keeping the overall economy robust. This has raised concerns among some officials that even if headline inflation moderates, strong economic growth could keep core price pressures persistently above the 2% target.
A strong June non-farm payrolls report released on Thursday, coupled with potentially higher inflation data later this month, could further strengthen the case for hawkish officials favoring a rate hike.
White House Pressure, Walsh Stresses Independence
Concurrently, the White House has publicly stated its opposition to further rate increases. Senior White House economic adviser Kevin Hassett, in an interview with Fox Business earlier that day, called a Fed rate hike "a macroeconomic mistake" and expressed his belief that Walsh agrees that AI-driven economic growth will not bring inflation and thus does not require rate hikes.
The correspondent noted that Hassett also hinted that some Fed officials might be inclined to hike rates for political motives, specifically mentioning Jerome Powell, who remained on the Board as a Governor after his term as Chair ended, expressing concern that a "majority of the Fed" voting for a hike might be "not necessarily out of patriotism, but to go after Trump." However, Hassett excluded Walsh from this criticism, stating he faces the difficult task of "managing a group of unruly board members."
In response, the correspondent reported that Walsh clearly reiterated the Fed's independence stance at the forum, stating, "There will be no change on that point." He also cited the Supreme Court's ruling this week allowing Fed Governor Lisa Cook to remain in her position, saying it reaffirms the logic of the Fed defending its independence by fulfilling its duties. "If we achieve low and stable inflation, we don't have to worry about politics, and we don't have to worry about judicial intervention," he said.
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