Author: Wall Street Insights

The new chairman of the Federal Reserve, Waller, is facing a policy issue that resonates historically: raising interest rates may actually lower long-term interest rates, thereby achieving the Trump administration's long-held goal of reducing mortgage rates.

As the Federal Reserve's monetary policy meeting approaches this week, the bond market has priced in a 38% probability of an increase in the federal funds rate target, a significant leap from less than 10% before Waller's appearance at the Senate Banking Committee hearing. The sentiment index from Bloomberg Economics indicates that the current decision-makers are the most hawkish since the beginning of the 2023 rate hike cycle, with a clear hawkish inclination among seven voting members.

Although this rate hike is not the baseline scenario, this logic is quietly spreading in the market: if Waller solidifies his anti-inflation credibility with an interest rate hike, it could squeeze the embedded inflation premium in long-term rates, thus driving down the cost of real borrowing, such as mortgage rates and auto loan rates—this is precisely the result the White House desires.

This logic is not without precedent; history has similar examples. The late former Fed Chairman Alan Greenspan faced a similar situation in 2004: the Federal Reserve raised the federal funds rate target from 1% to 4.75% by early 2006, yet long-term bond yields decreased, and the 30-year mortgage rate fell from a high of 6.34% in mid-2004 to a low of 5.47% a year later. This phenomenon was later referred to as the "Greenspan Dilemma."

However, Bloomberg Opinion's executive editor Robert Burgess pointed out that rather than a "dilemma," this is more a reflection of the market's forward pricing mechanism—each rate hike reinforces investors' assessment of the central bank's credibility in fighting inflation, resulting in downward pressure on long-term rates.

Secretary of the Treasury Bessent is familiar with the aforementioned logic. He clearly stated early last year that his and Trump’s policy focus is on lowering long-term rates, rather than pushing the Fed to lower the short-term target rate. Wells Fargo Securities Chief Economist Tom Porcelli also highlighted this idea in a research report to clients last week:

"We frequently hear from those who believe the Fed will raise rates soon, stating that Waller can achieve the outcome he and Bessent truly desire—lower long-term rates—through rate hikes. The logic is that raising rates will strengthen Waller's credibility in combating inflation and compress the inflation premium embedded in long-term rates."

Since taking over the Fed from Powell in May, Waller has consistently conveyed a tough stance to the public. During the Senate Banking Committee hearing on July 15, when questioned about whether he was maintaining communication with Trump, Waller made a clear statement:

"I have repeatedly told the President and the Secretary of the Treasury the same thing: they chose an independent person to do an independent job, and that is my plan."

Bloomberg Economics commented on this hearing, stating that Waller "does not disguise his hawkish stance," believing that after inflation has exceeded the Fed's 2% target for 63 consecutive months, the task of achieving price stability is more daunting than that of full employment. Waller also pointed out that infrastructure development for artificial intelligence is exacerbating inflationary pressures, as demand-side shocks are manifesting faster than supply-side responses.

Notably, immediately after Waller's remarks, the yield on 10-year U.S. Treasury bonds fell sharply, recording the largest single-day drop in three weeks—creating a mini version of the "Greenspan Dilemma," as the hawkish comments actually led to lower long-term rates.

Historical practices are also worth examining. According to research by TS Lombard strategist Dario Perkins, Paul Volcker initiated a rate hike less than two months after taking office as Fed Chairman, and Greenspan, Ben Bernanke, and Powell all took action within a month of being appointed; only Yellen was an exception—she did not raise rates until 22 months into her tenure. Perkins wrote in a report to clients:

"Newcomers always start with a hawkish stance, which helps establish anti-inflation credibility. Volcker once summarized this atmosphere with a comment welcoming Greenspan's first rate hike: 'Congratulations—you are now a real central bank president.'"

However, the constraints of reality cannot be ignored. Recent inflation data shows that price pressures have eased, and the five working groups Waller announced are conducting a comprehensive review of how the Fed operates, with results expected by the end of the year—tightening monetary policy suddenly before review conclusions are made is a rather delicate timing. Additionally, Waller holds only one vote in the Federal Open Market Committee, and changing the policy rate requires the support of seven votes.

Nevertheless, given that several committee members have already hinted at the need for further policy tightening, this threshold may not be as difficult to overcome as it appears. Even if no rate hike occurs this week, the mainstream market judgment is that Waller is systematically strengthening his anti-inflation credibility, which itself may already be the most powerful prerequisite for lowering long-term rates.

免责声明：本文章仅代表作者个人观点，不代表本平台的立场和观点。本文章仅供信息分享，不构成对任何人的任何投资建议。用户与作者之间的任何争议，与本平台无关。如网页中刊载的文章或图片涉及侵权，请提供相关的权利证明和身份证明发送邮件到support@aicoin.com，本平台相关工作人员将会进行核查。