Federal Reserve Governor Christopher Waller is set to deliver comments at the US equity close. The event is being held by the Mid-Size Bank Coalition and it's a virtual event, so there's always the chance it's a dud but the topic is the economic outlook so it would be tough for him to avoid wading into the path of interest rates.
Most importantly, Waller is the resident hawk on the Board of Governors so if there is a shift -- like there was last summer -- he's likely to be the first one to make it, or at least to test the waters with a hint.
The last time we heard from Waller was in early February just after the strong January non-farm payrolls report and these were the headlines:
- Some moderation seen in compensation but not enough
- Needs to see continued moderation in inflation before his outlook changes
- Recent trend in inflation 'encouraging' but need to be confident inflation is declining
- Fed will need to keep 'tight stance' on policy for some time to slow activity further in 2023
- Says he is not seeing signals of a quick decline in inflation, prepared for a longer fight
It's reasonable that we could get something along the same lines and if so, that would be something of a sigh of relief for the market. Given that recently we haven't seen a more-hawkish shift from Bullard or Mester, I'd be a bit surprised if he started to talk about a higher Fed funds peak.
I think the playbook that the Fed is shifting to is keeping rates around the peak -- likely 5.25-5.50% -- for longer, rather than pushing up the peak and potentially having to cut. So far that effort is resonating with markets and the best representation of that is the 2-year note yield, which is now at a cycle high in an indication that the peak-and-reversal trade priced into Fed funds at the turn of the year is dead.
At the same time, the Fed doesn't want to take anything off the table. Waller may emphasize that angle to firm up credibility and that could sound hawkish to the market.
I think this is an instance where you need to go where the headlines take you but also keep in mind that Powell is going to be testifying in Congress next Wednesday so there's no need to rush to judgement.