CICC: It is expected that Waller will reiterate inflation risks and retain the option for interest rate hikes to rebuild credibility.

Zhongjin released a research report stating that this weeks market focus is on the Jackson Hole meeting and Walsh's speech. Prior comments from Walsh suggesting "letting the market raise rates on behalf of the Federal Reserve" failed to alleviate inflation concerns. Coupled with ineffective intervention by the Treasury and a loss of policy credibility, U.S. Treasury yields continued to rise. It is expected that Walsh will reiterate inflation risks and keep the option to raise rates to rebuild credibility, while also maintaining his long-standing positions of reducing central bank intervention and lowering communication frequency. Zhongjin believes that Walsh has not abandoned the policy idea of "reducing the balance sheet + cutting interest rates," but the premise on which it is based is misaligned with the current realities, requiring coordination and clearer expression. If Walsh can demonstrate sufficient policy flexibility, market concerns about U.S. Treasuries may ease, supporting the dollar; conversely, if trust continues to erode, long-term U.S. Treasury yields may rise further, putting pressure on the dollar. Zhongjin's main points are as follows: This week, the global market focus is undoubtedly on the Jackson Hole central bankers' annual meeting, particularly the speech by Federal Reserve Chairman Walsh, scheduled for Friday. This meeting is attracting extra attention because, over the past month, the credibility of both U.S. monetary and fiscal policy has been called into question by the market, and investors are eager to hear clearer policy signals from Walsh. Looking back at the July FOMC meeting, the Federal Reserve chose to keep rates unchanged, and Walsh claimed in the press conference that they would "let the market raise rates on behalf of the Federal Reserve." Zhongjin had previously pointed out that against the backdrop of U.S. inflation being above the 2% target for five consecutive years, such statements not only failed to calm market concerns about inflation but also raised fears of an insufficient resolve from the Federal Reserve in combating inflation, which may exacerbate volatility in the bond market and spill over to the stock market. Subsequent market trends confirmed this judgment: entering August, U.S. Treasury yields continued to climb, and the term premium for 10-year Treasuries rose significantly, with the yield curve steepening (Chart 1). Indeed, the rise in term premiums is a result of multiple overlapping factorsgeopolitical tensions in the Middle East driving up oil prices, an explosive increase in bond issuance by AI-related companies, and concerns over U.S. government debt levels. However, Walsh's prior failure to gain market trust is also a significant factor that cannot be overlooked. After yields increased, the Treasury promptly announced an expansion of its bond repurchase program, attempting to intervene. That day, the yield on 30-year Treasuries fell by about 10 basis points in response, but the following day, yields began to rise again. Soon after, the U.S. August S&P PMI data hit a four-year high, together with rising oil prices, pushing yields even higher and completely negating the effects of the Treasury's intervention. The market widely believed that this intervention not only lacked substantial effects but might have further damaged the credibility of the policy. Against this backdrop, Walsh's speech this Friday is crucial. In Zhongjin's view, his main task is to release clear signals to the market and restore the credibility of the Federal Reserve. To achieve this, he may need to convey several key messages: first, to reaffirm that inflation risks have not dissipated; second, to emphasize that interest rate tools remain the core means to address inflation; and third, to indicate that if inflation data rises excessively, the Federal Reserve will tighten policy further. It is important to note that these statements do not equate to a premature announcement of interest rate hikes but rather resemble an attitude of not ruling out rate hikes, serving not as forward guidance but as a option signal. In fact, this is precisely the attitude the current bond market desires to seesignifying that the Federal Reserve is willing to act should inflation risks rise again. This attitude largely aligns with the current stance of most Federal Reserve officials. The latest July FOMC meeting minutes reveal that several officials advocated for a rate hike in July, while more officials believe that if inflation cannot continue to fall, further tightening of monetary policy will be necessary in the future. This suggests a strong consensus within the Federal Reserve to maintain a tighter monetary policy, and as chairman, Walsh has the responsibility to clearly communicate this consensus. At the same time, Zhongjin expects Walsh to continue advocating for reduced intervention by the Federal Reserve in the markets. For example, he may provide theoretical support for abolishing forward guidance, reducing communication frequency, and laying the groundwork for future abolishment of the dot plot, as well as reducing the number of FOMC meetings from eight to six per year. He may also further insist on the direction of balance sheet reduction, clarifying the boundaries between monetary and fiscal policy, and emphasize the impact of AI on economic structure and statistical data, advocating that monetary policy should adapt to new macro and technological environments. In Zhongjin's view, Walshs policy idea of "balance sheet reduction + rate cuts" itself has not wavered, but the premise of this idea is misaligned with current realities. Walsh's logic is based on the assumption that AI can enhance productivity, thereby lowering inflation. In the long run, this assumption may not be wrong; however, the issue lies in the fact that the transformation of AI investment into productivity takes time, whereas the inflationary pressures arising from current capital expenditure expansion and rising oil prices are immediate. There is a clear time lag between ideals and reality. Therefore, this week will truly test whether Walsh can maintain his long-term principles while being flexible enough to address short-term realities, and clearly articulate the misalignment between long-term and short-term considerations. Zhongjin believes that if Walsh can demonstrate this flexibility, market trust in the Federal Reserve will strengthen: the yield on 2-year Treasuries might rise briefly, but yields on 10 to 30-year bonds are likely to fall, leading to a flattening yield curve. The stock market may experience short-term corrections, but in the medium term will benefit, with the policy uncertainty premium expected to decrease. The dollar is poised to receive support, while gold may come under pressure. Conversely, if Walsh chooses to ignore short-term issues and insists solely on his long-term views, market skepticism toward the Federal Reserve will deepen, and the logic of debasement trade may continue. At that point, yields on 10 to 30-year Treasuries may continue to rise, the dollar's credibility may suffer greater erosion, and gold may continue to rise.