Federal Reserve Governor Christopher Waller indicated that policymakers may need to raise interest rates in the near term if underlying inflation continues to signal broad-based price pressures.

In prepared remarks for a New York event on Monday, Waller stated, "If core inflation comes in hot again this week, then the FOMC will need to consider tightening monetary policy in the near future."

Wall Street's Advice for Warsh: No Need for Forward Guidance, but Clarify the Policy Reaction Logic

Federal Reserve Chairman Kevin Warsh's focus on avoiding signals about the future path of interest rates has also obscured another piece of information crucial to investors, analysts, and other policymakers: how he will respond with policy when the economy faces challenges.

Warsh is set to appear before Congress for hearings on Tuesday and Wednesday. Market participants will closely watch his views on inflation, the labor market, economic growth, and how he sees these factors relating to interest rate policy. However, if his recent public comments are any guide, they may still struggle to get clear answers.

Beyond "forward guidance," another frequently mentioned term recently is "reaction function," a concept used by Waller and several economists. While this term is technical, it is central to the current discussion. Economists believe it's necessary to clearly distinguish between these two concepts.

As explained by Andrew Sacher of Economic Research: "Forward guidance tells the market what path the central bank expects to follow; the reaction function tells the market how the central bank will respond to various surprises without pre-disclosing the policy path."

Many, including Waller, acknowledge the validity of Warsh's view that providing excessive forward guidance could tie policymakers' hands, as it risks misleading markets into thinking the Fed has already committed to future rate decisions. However, by delaying the clarification of his reaction function, he may also be creating another significant risk.

Pricing in financial markets, particularly for key benchmarks like the 10-year US Treasury yield and the Secured Overnight Financing Rate (SOFR), depends in part on investor expectations for future central bank policy actions. If the market accurately understands the central bank's policy reaction logic, investors can more reasonably predict potential interest rate moves based on their own economic outlooks. If these predictions are broadly accurate, it can not only help reduce market volatility but may also shorten the time it takes for interest rate adjustments to impact the economy.

"Good communication should convey the Fed's reaction function, which is the relationship between economic conditions and the path of the policy rate. That's what really matters," said Richard Berner, a former Fed researcher in the 1970s and now a professor at New York University. "This is different from forward guidance."

Societe Generale Recommends Buying 2- to 5-Year US Treasuries

Societe Generale's interest rate strategists recommend gradually building long positions in 2- to 5-year US Treasury notes, citing that "short-end yields are near their highs for the year, and carry remains attractive."

Following the latest surge in oil prices triggered by the collapse of a US-Iran war ceasefire agreement last week, yields on 2- to 5-year Treasuries rose on Monday to their highest levels since 2026.

"Although geopolitical risks may persist, yields near the high end of the recent range could attract investors to gradually build long positions," said Societe Generale strategists including Subadra Rajappa in a July 9 report.

Wall Street Giants to Report Earnings; UBS Says Goldman's Results and JPMorgan's Succession Will Be in Focus

UBS analyst Erika Najarian stated that Goldman Sachs faces the biggest test in this earnings season, and standing out among the major Wall Street banks will not be easy; meanwhile, investors are focusing on who might succeed Jamie Dimon as CEO of JPMorgan Chase.

"Goldman has the most to prove, given market expectations and investor positioning," Najarian said on Monday. Najarian noted that five of the six largest US banks will report results on Tuesday, adding, "It will not be easy to stand out, especially as I expect JPMorgan's earnings call will largely revolve around the succession question." Najarian is a stock research analyst at UBS covering large banks and consumer finance.

IMF Warns Europe Could Head Down a Dangerous Path Without Addressing Debt Issues

The International Monetary Fund (IMF) stated that Europe's sovereign debt situation could deteriorate significantly if it fails to get a handle on public finances.

A paper released on Monday by IMF economists including Luc Eyraud, Mahika Gandhi, and Andrew Hodge pointed out that the piecemeal fiscal approach of many European countries is unsustainable amid growing challenges such as an aging population, the energy transition, and strengthening defense.

Bank of America Survey: Global Fund Managers' Bearish Sentiment on Yen Highest Since 2022

A Bank of America survey shows that global portfolio managers' bearish sentiment toward the Japanese yen has risen to its highest level in about four years, as risks from Japan's fiscal and monetary policy outlook outweigh the potential for government intervention in the currency market.

"Investor bearishness on the yen is at its highest since 2022, driven primarily by monetary and fiscal policy risks," wrote Bank of America strategists including Ralf Preusser and Adarsh Sinha in a July 10 report.