Eric Wallerstein, chief macro strategist at Clocktower Group, told Full Signal host Phil Rosen that the Federal Reserve should not hike rates this year, because the bar for tightening is far higher than when inflation topped 6%.
He also laid out three trade ideas, Japanese banks, Mexican equities and European and US defense.
I sat down with Wallerstein on Full Signal to ask why markets were pricing a hike and what the Fed is really weighing. We recorded before the September meeting, and the Fed has since raised rates for the first time in three years.
Highlights from the interview also appeared in my newsletter on the bull case for energy stocks.
Why Wallerstein said the Fed should wait
Wallerstein said the economy looks much like it did in the first quarter, before hikes were on the table. "The bar for hikes is much higher than it was a few years ago," he said, when the Fed was at the zero lower bound.
He noted inflation was over 6% when the last hiking cycle began, versus about 3.6% at the time of our talk. He pointed to weakness in housing and construction outside data centers, and said nominal wage growth had slowed to below 3.1%.
A hike, he argued, would not slow chip prices or AI demand. It would mostly pressure vulnerable pockets of the economy and risk pushing unemployment higher.
His conclusion was that there is "plenty of reason to just wait a few months" and watch tariffs, the Iran war and Brent crude, then "start January fresh."
What is behind the hawkish dissents
Asked what drove the three dissents in favor of a hike at the prior meeting, Wallerstein pointed to inflation that is still above target and higher oil prices since the Iran war. He said the ECB has hiked on energy prices, but that Europe is more energy dependent than the US.
He also said the AI investment boom may be lifting the neutral rate. Longer term, he said he can see an environment where rates sit between 3.5% and 4% for the foreseeable future.
Warsh, credibility and the Fed itself
Wallerstein called the argument that Kevin Warsh must hike to protect his credibility "a little misplaced." In his view, "the Fed's credibility comes from making the right policy choices."
He said he does not think Warsh is there simply to cut rates. He believes the Fed chair's larger goal is structural reform, including a smaller balance sheet and less intervention in markets, which he described as a tightening bias.
On President Trump's calls for lower rates, he said a president asking for that "is not news."
Why bond yields are climbing
Wallerstein said long yields rose because growth surprised to the upside, the Fed shifted from dovish to hawkish, and term premium crept in. He described Treasury Secretary Scott Bessent's buyback step as similar to an FX intervention that is "just stopping the momentum."
He said he expects some air to come out of yields and a return to a range of 4% to 4.5%. His bigger worry was outside the US, naming France as an economy where high debt and sluggish growth make borrowing costs harder to escape.
On Japan, he said "Japanese banks benefit from reflation" and a steeper yield curve, even if the Bank of Japan keeps hiking. He expects growth to hold up and household investing to stay local.
On Mexico, he said "Mexico's great," pointing to USMCA renegotiation, the carry from rates around 6.5% and manufacturing demand tied to the US. He framed unhedged Mexican equities as a way to capture currency carry, currency gains and equity risk premium.
On defense, he said "demand outstrips supply," and that European primes can complement US contractors as governments replenish stockpiles after the Iran war.
Listen to the full episode
Tune in to the full conversation with Eric Wallerstein on YouTube, Spotify and Apple Podcasts.
For more on the Fed, read how Kevin Warsh raised interest rates as President Trump demanded the opposite, and subscribe to the free Opening Bell Daily newsletter for a daily briefing on stocks, macro and Wall Street.
Opening Bell Daily is for informational purposes only and is not investment advice. The views expressed are those of the guest, and comments on specific countries, sectors and trades are not recommendations. Wallerstein is chief macro strategist at Clocktower Group, and any positions his firm holds in the trades discussed were not disclosed in the interview.