The "Anna Karenina Principle" of monetary policy: Waller must maintain credibility, so the Federal Reserve must raise interest rates in September?

After Federal Reserve Chair Waller's first press conference, market doubts regarding the Fed's commitment to fighting inflation are rising. Bank of America Securities warned in its latest report that monetary policy resembles the "Anna Karenina principle"success requires multiple conditions to be met simultaneously, while the failure of any one critical element could lead to the abandonment of price stability goals. Following the Fed's 9 to 3 vote to keep interest rates unchanged, Waller did not provide a sufficiently clear policy explanation and instead emphasized that the market has effectively substituted part of the interest rate hikes through tighter financial conditions. This statement prompted the market to reprice: longer-term yields rose, the yield curve steepened, inflation breakeven rates increased, and the dollar weakened, reflecting the typical market response when central bank credibility is under pressure. Bank of America believes that if inflation data over the coming weeks does not provide clear dovish support, a rate hike in September may no longer be merely a policy choice but a necessary action to regain market trust and restore policy credibility. Waller's comments sparked market concerns: Is the Fed passively following the market, or is it actively anchoring inflation? Waller's statements at the press conference sent mixed signals. On one hand, he suggested that the financial market has proactively tightened conditions and that the Fed does not need to raise rates further to achieve a similar effect; on the other hand, he hinted that more inflation indicators might be considered and that tools beyond rate hikes could be used to address price pressures. Bank of America pointed out that the issue lies in the difference between Waller's policy logic and traditional central bank communication frameworks. The "Maradona rate theory," proposed by former Bank of England Governor Mervyn King, states that central banks set policy expectations to guide markets in tightening financial conditions in advance, thereby reducing their own pressure to raise rates. However, Waller's statements align more closely with a different logic: the market adjusts interest rates on its own, and the Fed merely needs to observe and follow. Yet, Bank of America believes this logic poses risks. An increase in long-term rates does not necessarily indicate that financial conditions are genuinely tightening; it may also reflect a re-pricing by the market of higher fiscal deficits, stronger economic growth, increased risk premiums, or higher inflation expectations. The market movements following the press conference reflect this concern: rising long-term real rates, widening inflation breakeven rates, and a further steepening of the yield curve indicate that investors are beginning to doubt the Fed's ability to maintain long-term inflation anchoring. Moderate employment growth supports a soft landing, strengthening the basis for a September hike. Bank of America expects that the U.S. added 80,000 jobs in July, slightly below market expectations, while private sector employment is projected to increase by 95,000, higher than June's figure of 49,000. The report states that there are no significant signs of deterioration in the current labor market. Initial jobless claims remain moderate, and job growth continues. Although seasonal summer factors, weak ADP employment data, and a slowdown in local government hiring pose risks, the overall trend continues to support an economic soft landing. Regarding the unemployment rate, Bank of America forecasts an increase from 4.2% in June to 4.3%, primarily influenced by a rebound in the labor participation rate. In terms of wages, average hourly earnings are expected to grow by 0.3% month-on-month in July, maintaining a year-on-year growth rate of about 3.5%, which has not yet shown significant inflationary pressure. Bank of America believes that if employment data meets expectations, it will indicate that nonfarm payrolls have increased for the fifth consecutive month, with an average monthly increase of about 89,000 jobs in the private sector in 2026, further reducing the downside risks in the labor market. In a context where employment remains resilient and inflation is still sticky, Bank of America believes that the rationale for last year's rate cutting cycle is weakening and that the foundation for a September rate hike is strengthening. Under the "Anna Karenina principle," the Fed faces a credibility test. Bank of America utilizes the classic opening line from Tolstoy's "Anna Karenina" and the "Anna Karenina principle" proposed by economist Jared Diamond to explain the current predicament facing the Fed. This principle posits that success requires multiple necessary conditions to be simultaneously met, while failure often only requires one critical condition to be absent. For monetary policy, achieving price stability necessitates not only interest rate tools but also the credibility of the central bank, stable inflation expectations, cooperation with fiscal policy, and a stable financial system, all working in tandem. Bank of America points out that monetary policy is not merely a mathematical model but an art that relies on communication. The core task of a central bank press conference is to ensure that the market understands its policy reaction function; if this fails, uncertainty will shift to the market, potentially leading to unanchored inflation expectations. The concern with Waller's press conference is that he did not clearly explain how the Fed plans to balance growth, employment, and inflation in the future. Bank of America believes that the Fed still has the opportunity to regain control of the market narrative, with the September meeting being a critical juncture. If future data fails to demonstrate a swift reduction in inflation, rate hikes may become an important step for the Fed to restore its credibility and re-establish policy anchoring. This article is sourced from "Wall Street Journal," author Li Jia, edited by GMTEight: Chen Qiuda.