On October 8, 2026, Federal Reserve Governor Waller delivered a speech at the Istanbul Economic Forum, focusing on the policy signaling function of the Summary of Economic Projections (SEP). The core argument of the speech was clear: the SEP is a flexible communication mechanism of the Federal Reserve, straddling policy silence and rigid forward guidance. It can both anchor market interest rate expectations and retain data-dependent adjustment space for monetary policy, making it the core tool currently used by the Federal Reserve to guide market expectations.

Economic Background of the Federal Reserve's Policy Shift

After maintaining interest rates unchanged for nine months, the Federal Reserve raised rates by 25 basis points in September 2026, bringing the policy rate range to 3.75%–4%. This tightening was not driven by a single data point, but rather by a reversal in the structure of the US economy. In the second half of 2025, US employment weakened and inflation approached the 2% target. The Fed cut rates by a total of 75 basis points as a precautionary measure to offset downward economic pressure. However, in 2026, while the labor market stabilized and recovered, the cooling of inflation stalled. The Middle East conflict pushed up energy prices, the expansion of the AI industry raised consumer goods prices, and escalating trade frictions brought potential tariff pressures. These multiple supply shocks collectively contributed to increased inflation resilience.

Current US Inflation and Employment Situation

Core PCE inflation briefly declined in mid-2026, but the improvement was not sustainable. In August, core PCE rose to 3% year-on-year, remaining at a high level of 2.5%–3.0% since the spring of 2024, significantly higher than the Federal Reserve's inflation target. High inflation has persisted for five and a half years, posing a risk of a disconnect between household and business inflation expectations, making it the primary target of current monetary policy. Latest data shows a robust US labor market, low unemployment, and strong economic resilience. The Federal Reserve believes that moderately tightening monetary policy will not trigger a recession; therefore, its policy focus remains on curbing inflation.

Comparison of Three Types of Monetary Policy Communication Models

Waller categorizes Federal Reserve policy communication into three types and clarifies the relative advantages of the SEP mechanism. First, the complete silence model, where the central bank does not signal the interest rate path, can easily trigger extreme market expectations and pricing confusion, causing significant fluctuations in financial conditions and weakening policy stability. Second, rigid forward guidance, which locks in the pace and magnitude of rate hikes in advance, can stabilize the market in the short term but completely eliminates policy flexibility, making it unable to adapt to complex and volatile macroeconomic environments and prone to policy mismatches. Third, the flexible signaling model of the SEP, which releases the overall policy direction and expected range of rate hikes through the Summary of Economic Projections, but does not fix the timing or magnitude of rate hikes, emphasizing that policy depends entirely on real-time economic data. This model achieves the optimal balance between market expectation anchoring and policy flexibility and is the Fed's current core communication framework.

Latest Policy Signals and Market Pricing from the SEP Dot Plot

The September 2026 FOMC dot plot released a hawkish signal: 16 members expect at least one more rate hike this year, 4 members expect two rate hikes; 8 members predict that interest rates will be 50 basis points higher than current rates by the end of 2027. The overall trend is "continuous tightening this year, with flexible policy adjustments next year." The market has fully digested the SEP signal. Interest rate futures data shows an 85% probability of one rate hike before the December meeting, and a close to 20% probability of two rate hikes; by March 2027, the probability of at least two rate hikes is close to 80%. Waller stated that subsequent rate hikes do not need to be implemented consecutively, but will be flexibly implemented within a reasonable window based on data.

Summary of viewpoints from mainstream institutions at home and abroad

Goldman Sachs believes the SEP dot plot was more hawkish than expected, and the economic resilience driven by AI supports room for rate hikes, but the flexible signal pattern will exacerbate short-term US Treasury volatility. Barclays judges that the Fed is inclined to lengthen its observation window and is likely to raise rates by another 25 basis points this year, without replicating the aggressive, continuous rate hike pace. Societe Generale points out that SEP only represents policy direction, not a fixed path, and energy and trade variables will continue to adjust terminal interest rates. Wells Fargo reminds that the dot plot reflects the individual expectations of committee members, not a unified commitment from the committee, and the market should not interpret it too linearly. Some brokerages also suggest that this round of inflation is mainly driven by supply shocks, which monetary policy cannot fundamentally address, and the flexible signal of SEP is mainly used to stabilize long-term inflation expectations. SEP balances credibility and flexibility, but it is easily misinterpreted by the market, and data fluctuations can easily trigger sharp reversals in asset prices. With continued supply-side inflation disturbances, the cooling effect of policy is limited, and the policy game cycle will be prolonged. The dot plot is a probabilistic signal; if core inflation continues to decline, this rate hike cycle may end prematurely.

Summarize:

In the current macroeconomic environment of high uncertainty and frequent supply disruptions, the Special Equity Payment (SEP) has become the Federal Reserve's most adaptable policy communication tool. Its core value lies in its ability to effectively guide market interest rate expectations and stabilize the financial system while retaining room for dynamic adjustments to monetary policy. Going forward, SEP signal corrections, changes in inflation data, and geopolitical supply shocks will continue to dominate global asset price trends.