Inflation was running above 6% year-over-year when the Federal Reserve started its last hiking cycle from zero. It is 3.6% and change now, and Eric Wallerstein says that is why the case for hiking again does not hold.
Most of the market disagrees with him — three officials dissented in favor of a hike at the last meeting, and futures have been pricing one. Wallerstein's argument is that the chair everyone is watching does not much care either way.
"Does he care about one or two interest rate moves in either direction? I kind of doubt that."
Wallerstein is Chief Macro Strategist at Clocktower Group and advised Stephen Miran at the Federal Reserve Board and at the White House Council of Economic Advisers before that, which is the experience the host leads with in the first question.
I listened to the full interview so you can skip it. 36 minutes of audio, 22 minutes of reading.
Here are the 15 arguments that matter.
👤 Guest: Eric Wallerstein, Chief Macro Strategist at Clocktower Group, previously an advisor to Stephen Miran at the Federal Reserve Board and at the White House Council of Economic Advisers
🎙️ Host: Phil Rosen, who co-founded the markets newsletter Opening Bell Daily after leaving Business Insider as a senior reporter
📰 Published: 10 September 2026 on YouTube (Phil Rosen)
🔴 YouTube | 🟣 Apple Podcasts | ⏱️ 36 min | ✅ Time saved: 14 min
Key Takeaways
The bar for a hike is far higher than in the last cycle because the starting point is different
Inflation was above 6% and rates were at zero then, against 3.6% now
His prescription is to wait for the steady state of tariffs and the end of the Iran war and "start January fresh"
A hike cannot reach the part of the economy that is actually hot
He asks what one or two rate hikes do to the price of chips, and answers that they hit housing and construction instead
Kevin Warsh's goal is structural, not cyclical, in his reading
Shrink the balance sheet, pull the Fed out of asset classes it should not be in, change how the institution operates
The two common criticisms of Warsh contradict each other: he cannot both be driving the committee and be presiding over more dissent than Powell ever had
The Fed's two inflation measures disagree by more than a percentage point, and the gap is made of things it cannot influence
PCE is well above 3% while core CPI is nearly at 2%
Long yields rose because growth surprised to the upside during a war, not because bonds are pricing a policy mistake
He expects them back to a steady state between 4% and 4.5%
Last year's tariffs were a fiscal tightening and this year's are a fiscal loosening
The effective rate halved from 12% to 6% and companies were refunded for the previous year's collections, producing a negative tariff rate through the second quarter
He is more worried about France than about the United States
French debt-to-GDP is far above America's, nominal growth is near zero and borrowing costs are high, so the debt compounds
His base case for the Fed meeting is a hawkish hold, which he calls risk neutral
A dovish hold produces "a huge rally"; a hike framed as the start of a campaign takes 2% to 3% off stocks
Japanese banks are his favorite way to own the Japan story
A steep curve, strong nominal and real wage growth, and households holding multiples more in bank deposits than in debt
Mexico is the trade he says nobody else is talking about
His view is that the USMCA renegotiation leaves Mexico a relative winner and Canada a relative loser, with four sources of return stacked in unhedged Mexican equities
European defense primes get the overflow demand the US majors cannot fill
What is short is planes, tanks and bullets rather than defense technology
1. Why He'd Wait Until January
Phil Rosen opened by noting that Wallerstein has worked in and around the Fed, and that he does not think the Fed should hike this year. Wallerstein's answer starts by comparing the two starting points rather than the two economies.
The economy today looks much like it did in the first quarter, before hikes were on the table, which he treats as the first problem with hiking now
The comparison he draws is with the beginning of the last tightening cycle. "And I think the bar for hikes is much higher than it was a few years ago when we were at the zero lower bound" — inflation was above 6% year-over-year then and the policy rate was at zero, against 3.6% and change now, which some Fed officials consider at least moderately restrictive
He says you can already see the restriction in specific sectors. Housing and construction are falling, and construction has fallen every quarter for the past couple of years even outside data centers: "So I think it's clear that financial conditions are restrictive for certain borrowers"
His sharpest objection is that a hike cannot reach the thing that is inflating. He asks what one or two rate hikes do for AI, and whether they slow the rise in chip prices, and answers that he does not think so
What he expects instead is damage without benefit. "We haven't done anything for inflation. We've hurt the consumer and ultimately now are we considering, you know, cutting again? And you don't want to do that flip-flop"
His recommendation is a pause with conditions attached. "So, I think there's plenty of reason to just wait a few months, see what the steady state of tariffs are, see what the Iran war ends up looking like and where Brent is, and go from there and start January fresh"
2. Why Markets Expect a Hike
Rosen said he has been arguing since January, before Warsh took office, that the next move is a cut, and asked why the market is convinced of the opposite.
Wallerstein's first answer is the simple one: inflation is above target, there is a global selloff in long-term bonds, and term premium has risen
He rejects the link many people draw between those two facts. Some read the long-bond selloff as the market pricing a Fed policy mistake or higher inflation; that is not how he reads it, though he accepts it gives the hawkish case ammunition
The timing of the impetus is what he finds telling. Five years above target adds pressure, "It's really interesting to me, though, there wasn't that impetus in February", "and then Warsh gets in and all of a sudden it's his job to rectify these past five years"
The forecast path is the core of his case. Economists and the market have inflation back at 2% within six to nine months, with core CPI falling from 2.5% to an expected 2.4% next month and 2.3% the month after: "It's not a target, but it's falling. It's close to target"
Because policy acts with a lag, a hike now is aimed at a period he thinks will not need it — the next 12 to 18 or 24 months, by which time the forecast has inflation at target
The falling unemployment rate is what he thinks gave the hawks confidence. In the first quarter the worry was the labor market coming undone; now unemployment is falling, and he suspects that has left people treating inflation as the only remaining problem
He does not share that read of the labor market. "But the labor market looks okay. I don't know if it's totally fine though" — he is not seeing the job-finding rates, quits rates or wage growth of a tight market, and "nominal wage growth has decelerated from, you know, four or five percent to below 3.1% last month"
He also flagged a measurement trap. With break-even payroll growth much lower than it used to be, monthly prints swing between very low and very high numbers, and a zero or negative reading spooks people without meaning much
3. What the Dissenters See
Rosen asked what the officials voting for a hike — three dissents at the last meeting — are looking at that convinces them.
He thinks the hawkish case is two facts and no more. Inflation has been and remains above target, and oil is higher since the Iran war: "I think that's really it"
The ECB is his comparison, and he says the comparison does not transfer. Europe has hiked and is about to hike again largely because of energy prices, but the European economy is far more energy-dependent and a gas or oil move feeds through to core inflation there in a way it does not in the US
He does not think the Fed itself is looking to hike, and notes that whatever the hawks are seeing has not been enough to move the median committee member
The one hawkish argument he credits is structural rather than cyclical. "The idea that the neutral rate is rising is probably the longer term or more intermediate term thing" that would justify higher rates, and he ties it to AI
4. The Capital-Demand Regime
Rosen asked whether "AI has been a contributor" meant the trillion dollars of capex, and Wallerstein said in part
The mechanism he describes is a reversal of the savings glut. When there was a shortage of investment opportunities, savings piled up and interest rates fell; now there is enormous demand for capital, of which hyperscaler capex is only the most visible piece
The list of things competing for that capital is longer than AI. Data centers and chips, but also power generation, broader re-industrialization, nearshoring and defense
On that logic he concedes the hawks a point. "And so if we're exiting the regime where you had a bunch of money printing and saving and we're entering a regime where there's less capital but more demand for it, then you might think, okay, maybe the Fed should be raising rates, especially if inflation's above target"
What he will not concede is the timing. He can see an environment where rates sit between 3.5% and 4% for the foreseeable future; he does not think this is the juncture to get there, or that the labor market would absorb it
5. Warsh and Credibility
Rosen put both of the market's competing theories to him: that Warsh has to hike or lose credibility as chair, and that Warsh was installed to cut and so has to do the opposite to protect his reputation.
He treats the credibility argument as an artifact of who is making it. "I think the credibility argument is a little misplaced and largely comes from the investor community which will easily change their mind about a Fed chair in a few months", and which is not looking at the job structurally
His definition of credibility is outcomes, not consistency. "So whether he makes the right policy or not will determine his credibility"
He ran the counterfactual to show the risk runs both ways. Had the Fed hiked in June and July and then received soft inflation prints and weak labor prints, that would arguably have been a policy mistake: the yield curve could have inverted, investors could have started pricing a growth downturn, and the expectation of further hikes would itself have tightened financial conditions
On the second theory he is blunt. "I also don't think he's there to cut interest rates"
6. What Warsh Actually Wants
Wallerstein's alternative reading is that the chair's agenda is institutional, which is why he thinks the size of any single rate decision is being overestimated.
The target he names is the Fed's footprint in markets. The Fed has bought not only Treasuries but intervened in asset classes he says it should not be involved in, which he classifies as lowercase-p political, and he reads Warsh's goal as getting away from that, asking why the balance sheet is the size it is, and "how can we kind of limit the Fed's intervention in markets?"
He points out which direction that cuts. Pulling the Fed out of markets is a tightening bias rather than an easing one, which is the opposite of the theory that he was installed to cut
The second piece is how the Fed reads its own data. He says the post-COVID inflation episode was handled incorrectly, with too much adherence to a tenth of a point in one indicator
The two official inflation measures disagree by more than a point. The Fed's preferred measure, PCE, is well above 3%: "But if you look at core CPI, it's nearly at two. And so, should the Fed just be blindly focused on one number or are they seeking to understand, okay, what's causing this divergence?"
His answer is that the gap is made of things monetary policy cannot reach — portfolio management fees, the weighting of computer equipment, and shelter
That is what leads to his sharpest line on the decision itself. For someone trying to restructure an institution he considers inadequate for its new environment, "Does he care about one or two interest rate moves in either direction? I kind of doubt that"
7. Is the Decision Political?
Rosen raised the president's public demand for the lowest interest rates in the world, said a lot of investors he knows believe Warsh is there to deliver it, and asked how the committee is actually approaching the decision.
Wallerstein's first move is to point at a contradiction in the argument itself. The people who say the decision is political also say Warsh is not driving the committee the way Powell did, and both cannot be true: "So I think you can't have it both ways"
The evidence he cites is the dispersion. Voters and non-voters are publishing individual frameworks for how they think about the economy and where rates should be, the balance of the committee decided not to hike, and he does not read that as a Warsh-driven outcome
His characterization of the change is procedural. Warsh seems to be ushering discussion, where the Powell Fed was "almost predetermined" and nearly every decision was baked before the meeting, which is what made Fed-watching easy
On presidential pressure he takes the long view. A president telling a central bank to lower rates is not news except in the way it is now communicated: "It's pretty much the reason so to speak that every central bank chair was put in". "So like is that a departure from Fed norms? It's kind of the status quo in some ways"
Rosen conceded the point as the context most people miss, saying he personally has little sense of how previous presidents picked their chairs or what they said ahead of rate decisions
8. Reading the Bond Selloff
Asked about yields at multi-year highs and the Treasury's enlarged buyback program, Wallerstein began with a methodological point about how market moves get explained.
His framing is sequencing. Using gold as the example: central banks buy first and nobody notices, then retail buys ETFs as the price rises or real rates move, then speculation stacks on top. All three drive the move, but one underpins it
For US long yields the underpinning is growth. "So in terms of long yields in the US, I think it was fundamentally just we had stronger growth than people expected"
The starting conditions made the surprise larger. The 10-year was below 3.9% when the Iran war began, a software-sector collapse was a hot topic, Governor Waller's view that the labor market was fragile had real credibility, and the market was pricing several cuts
Then the economy beat expectations during a war. He credits the tax bill, deregulation and private-sector re-industrialization, and says it was never as bad an economy as some had envisioned — so strong labor prints and accelerating consumer spending, helped by the World Cup and by downbeat expectations, produced what he called almost a double beat
He thinks the conclusion drawn from that was too strong. "I really think it was more of just an oscillation around a trend" — everyone was too downbeat and then way too upbeat. "The economy is in decent shape. It's doing pretty good, but there's some pockets of weakness"
The rest of the move is composition, not signal. Real rates are higher on stronger growth; the Fed shifting from dovish to hawkish erased a bias and level-shifted the whole curve; and a little term premium sits on top of that
The global leg of it is a worldwide investment surge. Germany and Japan are spending, economies exiting a low-growth malaise, and Japan, South Korea and even Europe surprised to the upside during an energy shock — mostly because of AI — which he says helped the higher-rate story spread
The last leg is reflexive. Everything selling off makes people step away, selling bonds in the expectation of further falls, negative headlines follow, and it spirals
That is how he reads Secretary Bessent's intervention. "It's almost like an FX intervention" — when Japan intervenes in the yen it is not revaluing fair value, only stopping the momentum, and he thinks stepping in on that basis makes sense
9. Tariffs as Fiscal Impulse
The part of the bond story he says people are missing is that tariff policy flipped from a fiscal tightening to a fiscal loosening between last year and this one.
Last year's tariffs shrank the deficit. People were alarmed that the bill would raise the deficit; the CBO scored the tariffs and, on his account, the entire additional deficit impact was offset by them
This year it reversed. With the IEEPA tariffs struck down the effective tariff rate fell by half — "So from 12% to 6%" — and companies were being refunded for the previous year's tariff collections
The combination produced a negative tariff rate through the second quarter, which he calls a big fiscal impulse and a meaningful contributor to the economy
Bond yields are where that shows up. A fiscal impulse has to be paid back through future surpluses, inflation or higher rates, all of which raise the stock of debt and add term premium
He thinks it is already reversing, which is why he expects some air to come out of bond yields and a return to a steady state between 4% and 4.5%
10. France, Not America
Rosen said the read sounded more optimistic than the doomer headlines about yields at their highest since 2007, and asked what does worry him.
What worries him about the US is the momentum of the selloff rather than the fiscal position. "The momentum is probably the worst thing I will say"
He is as concerned as anyone about entitlement spending and sees no end to large primary deficits, but is cautiously optimistic the US can grow out of it or at least limit the growth in the debt stock
His own debt projection is below the official one. "So like you know we're at 100% public debt to GDP. CBO has it going to 120. I'm probably more like 105", on the strength of productivity growth. "I think generally we can grow quicker than our cost of capital"
France is the case he says fails that test. Its debt-to-GDP is much higher than America's, and "Their nominal growth is like nearly zero" in a sluggish economy with high rates — "So their cost of capital is much higher than their growth rate. And then the large debt stock just compounds that"
He is not fully convinced by the popular election narrative that either the right or the left would run a stimulus-oriented government, and thinks one would be more austere than the other, but does not know whether the government adjusts in an austere direction
The general case he draws is a split rather than a crisis. Every one of these economies faces the same steepening curve, long-bond selloff and higher term premium: "I think there's going to be a huge divergence in the next you know 3 to 5 years between the economies who can handle it and have strong underlying growth and the economies that are subject to these global borrowing costs but don't really have the growth to you know make up for it so to speak"
Asked whether that makes the US best positioned, he said it usually is, and named the same-shaped story in the Iran war. Among developed markets, "If you're looking at developed markets, I think it's like the US and Japan, frankly", plus some European economies outside the Franco-German core — Sweden and Norway, the economies outside the ECB
11. AI Capex Is a US Story
Wallerstein's reason for staying constructive on the US runs through where the money from the AI build-out actually lands, and he separates the durable part from the speculative part.
The power generation gets built either way. He calls the demand dual use: "Like no matter what happens in the future, no matter if like Fable 5.3 sucks or not, we need the power gen"
The corporate ownership is American. "These are all US-listed companies", and the tax revenues largely accrue to the US
So does the labor income, and it gets spent locally. "The employees who are getting huge windfalls when these companies go public live in the Bay Area and they spend on homes, they spend on services"
He separates the immediate effect from the productivity story. Corporate and employee tax revenues are the hit right now; better productivity, better growth and better tax revenues are the longer-term version
He noted the labor-market irony himself — the labs said to be about to take everyone's jobs are hiring a lot of people
Rosen's own contribution was a data point from the press. He cited a piece in The Economist saying AI had generated a million jobs in what he thought was the previous two years, called it counter-narrative, and argued that entire new industries are being invented while some jobs disappear
12. Four Ways the Fed Lands
Asked whether a hike or a hold is bearish for stocks, Wallerstein said the tone matters more than the decision and laid out four combinations.
His base case is a hawkish hold, and he calls it neutral for risk. "So my base case is that there's a hawkish hold" — no move on rates, but hawkish communication, possibly through the summary of economic projections. If he were a Fed official he would mark growth a bit higher and unemployment a bit lower, revise PCE inflation down and then add back some tariff and energy effect, leaving the projections roughly unchanged. "I think that would be risk neutral"
A dovish hold is his big upside scenario. A hold framed as the economy looking good, inflation arriving at target soon and a longer pause ahead: "Super risk on. You'll get a huge rally". He thinks long-term yields would rise for a day or two even so
A hawkish hike is the one that hurts. A hike framed as inflation reaccelerating or not close enough to target, with more to come: "You know, that's riskoff, super bearish, like I think stocks fall 2 3% in that instance"
A dovish hike is neutral again. One hike framed as probably the last, taking back some of the insurance cuts from a couple of years ago and then waiting six months, reads as a decent outlook
Weighting those, he expects continuity. "So, broadly, I think stocks will kind of just keep doing what they were doing", with roughly a 10% tail risk on either side of a sharp risk-off move or a Nasdaq and crypto rally
Rosen agreed the coverage collapses this into a binary — hike means crash, no hike means rally — and called the distinction between hawkish and dovish versions of each the nuance the media cannot carry
13. Japanese Banks
The first of three trade ideas Rosen asked about before filming. Wallerstein was careful to say it is not a bottom call.
The trade is already working and he thinks it continues. "They've been doing great this year, but I just think there's room to continue"
The mechanism is the ordinary one for banks. "Japanese banks benefit from reflation. They benefit from a steeper yield curve"
He expects the curve to stay steep through BOJ hikes. The Bank of Japan is expected to hike several times over the next few quarters, and he still expects a steep curve and faster, not slower, growth: "And I also don't expect growth to slow down. If anything, I expect growth to speed up"
The household balance sheet is his edge. "So an interesting thing about Japan is that the consumer is way less leveraged than even the US", and US consumers have themselves deleveraged since the pandemic. Outside households in their twenties, "The average household has multiples in bank deposits that they have in debt, you know, outstanding debt"
The arithmetic he sketches is a policy rate at 2% against a long end of 4% to 4.5%. With households encouraged to invest domestically through government action, stock performance and higher yields, "You're just going to get more local investment. And I think that's perfect for banks. It's more lending"
Domestic consumption should hold up too. "Wage growth has been super strong both in nominal and real terms", and a stronger yen improves purchasing power — he thinks the yen peaked around 160 to 165 to the dollar and is not going to 100
He rejects the revaluation scare. He does not expect the yen to revalue so far that an export-led economy is finished, and "I think BOJ policy rates are going to stay well below the rest of the world"
The reason he picks banks over individual companies is access. Unless an investor is going to do the fundamental work on a specific Japanese company, "I think banks are like a really good way to get exposure to that national story"
14. The Mexico Trade
The second idea, and the one he says he does not hear from anyone else. Rosen said as much on air.
He has a name for the thesis. "Mexico's great. Our southern friends" — and he calls his view "the Carne Assada argument", his own tongue-in-cheek label for the position that the USMCA renegotiation would unduly benefit Mexico relative to Canada
The asymmetry is the whole trade. "Canada would be a relative loser. Mexico would at least be a relative winner if not win in outright terms"
He expects the new bargaining to seek symmetry on trade terms but thinks Mexico can concede on other dimensions — a more national-security-flavored, North American fortress arrangement — because the US actively wants Mexican industry and manufacturing to do well
The conclusion is a volume call. "And I think Mexican exports to the US are going to absolutely surge"
The supporting conditions are currency and carry. "It's a decent environment for the peso", political stability is better than elsewhere in Latin America, rates around 6.5% are decent carry, and inflation does not look bad
Rosen asked whether this is a whole-market macro bet, and Wallerstein said yes. Unhedged Mexican equities give the carry from the currency, any currency appreciation, the equity risk premium of an emerging market and an equity market he expects to perform: "So you're getting like four drivers right there"
He also argued Mexico is misclassified by risk. Dispersion within emerging markets is wide — South Korea is one, Nigeria is a high-rate carry story he thinks may actually be a frontier market — and "I think Mexico is as close to a developed market as you can really get among the EM"
The Canada leg compounds it. Whatever share of flows shifts from Canada to Mexico arrives under long-term contracts, so it adds to Mexico's own national story and its sensitivity to US growth rather than replacing them
15. Defense Demand vs Supply
The third idea, which he said he had raised on the show a couple of months earlier.
The European defense trade went through a sentiment low and has recovered. It was hot last year, faded and turned very downbeat, and he says the Financial Times more or less marked the bottom with a story arguing the stocks were bad
Two things are driving it now. The Franco-German and Brussels core is more committed to Ukrainian defense, and European governments are hedging their defense supply chains away from China
US defense majors get demand from East Asia and Europe at the same time, which is where the capacity problem starts
What is scarce is hardware, not technology. "You need like core goods, you know, core defense goods. Like you need planes, you need tanks, you need bullets", and there is only so much defense technology can do
His conclusion is the imbalance. "I actually think demand outstrips supply", so European primes can complement the US majors — not at the frontier, but able to do the work
US stockpiles spent in the Iran war add to it, in his view increasing the emphasis on more contracts spread across more companies, because "like Lockheed Martin simply can't do everything itself"
Wallerstein's bottom line is that the Fed decision most of the market is trading is close to irrelevant: the rate path resolves itself by January whichever way the committee votes, the chair's real project is the institution rather than the cycle, and the money is in Japan, Mexico and defense hardware rather than in guessing the vote.
Bonus Insights
Rosen told Wallerstein he agreed with him and had been saying since January that the next move is a cut, which puts the host's own position on the record rather than leaving the conversation one-sided
Wallerstein said explicitly that he understands why markets overreact. He called the peaks and troughs a reaction to narratives and overreactions, and added that there is a lot going on and the net effect is genuinely hard to parse
His emerging-market taxonomy was an aside worth keeping. South Korea is formally an emerging market and looks nothing like Nigeria, which has very high local rates and is a good carry story, and which he suspects is classified as frontier rather than emerging anyway
He named East Asia broadly, not just Japan, saying South Korea and Taiwan both look good and that the re-industrialization boom benefits the region — an early-cycle story in his framing
Asked where to follow his work, he pointed to his posting on X and a Substack linked from it, and when Rosen asked for the handle said it is his own name
Products, Companies & Tools Mentioned
Lockheed Martin (Named as the constraint on US defense supply — he says it "simply can't do everything itself", which is why he expects contracts to spread to European primes)
If this was worth your time, send it to someone who has to have a view on this.
Get the latest market chatter as it happens: