Federal Reserve Chair Walsh's strategy of abandoning forward guidance is drawing strong criticism from Wall Street. After holding rates steady for two consecutive policy meetings without providing a convincing explanation, the bond market delivered its verdict—the 30-year Treasury yield surged to its highest level since 2007.

Following Wednesday's meeting, Walsh stated at the press conference that the Fed is "unwavering" in its fight against inflation, but also hinted that the rise in long-term rates has partially done the tightening work for the central bank, making active rate hikes unnecessary. This interpretation was seen by the market as clearly dovish, triggering a sharp steepening of the Treasury yield curve. The 30-year Treasury yield briefly rose to 5.24% on Thursday, while the spread between 30-year and 2-year yields widened from about 0.8 percentage points to 0.97 percentage points, marking the largest single-day move in nearly a year.

Major Wall Street institutions promptly issued sharply worded research reports. JPMorgan Chase titled its report "Talk is not enough," Bank of America stated the market was "left confused by the dovish stance," and Morgan Stanley directly pointed to "credibility." Several investors warned that Walsh's simplified communication strategy "has begun to backfire" and risks eroding the Fed's influence over the $31 trillion Treasury market.

Holding steady causes market confusion

Walsh took office as Fed Chair in May, promising to rebuild the central bank's reputation as an inflation fighter. However, with inflation persistently above the 2% target, the Fed has maintained interest rates unchanged for several consecutive meetings. At Wednesday's meeting, there was clear internal division—three committee members voted for a rate hike, but the final decision was to hold steady. Walsh's explanation at the press conference was that real interest rates have risen since the June meeting, and the market has already partially completed the monetary policy tightening work.

This logic left investors puzzled. Stephen Jones, Chief Investment Officer at Aegon Asset Management, said, "Whether intentionally or not, he has relinquished any sense of control over the Treasury market. This is a significant shift compared to the intentions and approach of previous Fed chairs." ING strategist Francesco Pesole was more direct: "Walsh's no-guidance strategy has already begun to backfire." He noted that the steepening of the yield curve after Wednesday's press conference "looks very much like a trade of lost confidence."

Wall Street: Damaged credibility, unclear policy path

Multiple institutions criticized Walsh's communication style in their reports, with the core contradiction being: the Fed claims to prioritize inflation but delays action and fails to clearly explain its reaction function. Michael Gapen, Chief U.S. Economist at Morgan Stanley, stated, "The Fed's credibility took a hit yesterday, but it doesn't mean it's irreparable." He used a referee analogy: "The Fed is not a referee who sets rules, enforces them, and is a neutral arbiter. The Fed cares about who wins. It has goals and a mission; it's a participant on the field. Others cannot play the game without knowing how the Fed will act."

Jay Barry, Global Head of Interest Rate Strategy at JPMorgan Chase, and his team pointed out that Walsh's comments suggest the balance sheet tool may be more involved and that the commitment to the 2% inflation target has weakened, "with risks pointing to further bearish steepening." The bank has moved its forecast for the first rate hike to December. Aditya Bhave, U.S. Economist at Bank of America, argued that "the need to rebuild credibility increases the probability of a rate hike in September." He also noted that Walsh made several clearly dovish statements at the press conference: opening the door to using inflation indicators other than PCE, suggesting tools other than rate hikes are available to fight inflation, and hinting that the market has already done some of the tightening work for the Fed.

Abandoning forward guidance: What cost to the market

This shift in communication strategy led by Walsh is one of the most significant policy differences from the Powell era. He has clearly stated that the Fed needs to "observe the market's direct, unfiltered reaction to developments" and described reducing forward guidance as "an improvement," adding that the central bank is "just getting started" with its new communication strategy. Nicholas Colas, co-founder of DataTrek Research, noted, "Allowing Treasury prices to be determined almost entirely by the market, rather than the Fed intervening through forward guidance, is the single most distinctive difference between the Powell and Walsh eras."

Stephen Jen, CEO of Eurizon SLJ Capital, believes the market is in an adaptation period: "Walsh has been in office for a few weeks, and the market is still grappling with the Fed's philosophical shift—about what the yield curve is and how it will be used. A half-generation of 'Fed watchers' were trained to map officials' comments into specific basis point moves on the yield curve. That game is over." Ian Lyngen, Head of U.S. Interest Rate Strategy at BMO Capital Markets, raised a key counterpoint: the market's substitution for Fed tightening has a time limit, stating, "The market will only effectively substitute for Fed tightening until it sees FOMC policy follow-through."

Rising long-term rates, broad financial tightening

The direct consequence of this bond sell-off is a significant increase in U.S. long-term borrowing costs. The 30-year Treasury yield briefly touched 5.24% on Thursday, the highest since 2007. Rising long-term rates will increase U.S. public financial pressure, raise corporate financing costs, and tighten credit conditions for the household sector by pushing up 30-year mortgage rates. Barclays strategists Anshul Pradhan and Demi Hu believe the key takeaway from this FOMC meeting is that the tightening needed to bring inflation back to the 2% target "is more likely to be achieved through rising long-term rates rather than the Fed raising the overnight policy rate." They also noted that "with increased uncertainty about the reaction function, the bar for a September rate hike is higher, but the bar for a further rise in long-term yields is lower."

Bob Elliott, Chief Investment Officer at Unlimited Funds, summed up the situation bluntly: "Asset prices falling to rebalance the economy is, to some extent, inevitable. The question is whether it's the easy path (Fed-led) or the hard path (long-end driven). Yesterday's move suggests the harder path lies ahead." Leah Traub, Global Head of Interest Rates at Lord Abbett & Co, raised a deeper concern: "If the 5-year breakeven inflation rate continues to rise significantly, that's when people will truly start questioning the Fed's credibility."