Bank of America Securities said in its Sept. 4 global economics weekly that Federal Reserve Chair Warsh and Governor Waller delivered sharply different policy signals in the same week, exposing what the bank described as a communication paradox at the central bank.
Warsh’s hawkish speech at Jackson Hole led markets to reprice the probability of a September rate increase. Waller’s dovish remarks, delivered in the same week, pointed in a different direction. Using the rate-hike styles associated with former Vice Chair Kohn and former Chair Bernanke, the report framed the issue with a question: is this a Kohn day or a Bernanke day?
Two different messages from Warsh and Waller
In BofA’s framework, the Bernanke path means slow, pre-emptive rate hikes. The Kohn path means waiting longer and then hiking faster and more aggressively if inflation deteriorates.
The bank said Warsh, trying to repair credibility damage from the July press conference, was pushed into offering more directional guidance than markets had expected. Waller did not face the same burden and was able to describe a state-dependent policy rule more directly.
BofA said Warsh’s hawkish stance effectively told markets that the default path had shifted toward the Kohn track. He did not formally commit to a hike, but he gave more directional guidance than his communication philosophy would normally suggest.
The central lesson of the exchange, according to the report, is that the more clearly policymakers explain the rule, the less they need to guide markets toward one specific path. Warsh was, in effect, signaling that the Fed may already have waited too long and that markets should be prepared for the Kohn path. Waller’s message was different: this is the roadmap, and if conditions stay favorable the Fed follows the Bernanke path, but if conditions worsen it switches to Kohn.
BofA said the contrast comes down to how much each official has at stake. As chair, Warsh has to repair the credibility cost of the July communication error and therefore had to give stronger directional guidance. As a governor, Waller does not carry the same burden and can speak more freely about conditionality.
The bank’s conclusion was direct. Warsh, in the name of restoring credibility, ended up offering more forward guidance. Waller, in the name of explaining conditionality, gave the market less information about the likely rate path. BofA said that tension is central to understanding the Fed’s current communication problem.
$40 trillion in U.S. debt is not the main driver of rising yields
U.S. national debt has passed $40 trillion, but BofA said that should be seen mainly as a numerical milestone. Markets have shown limited sensitivity to the absolute debt level itself. The real drivers of yields, in the bank’s view, are changes in fiscal deficit expectations and the pace of Treasury issuance.
Crossing the $40 trillion threshold is not, by itself, the catalyst for the recent rise in long-end yields, the report said. The more important issue is interest expense. BofA said federal interest payments have already exceeded defense and Medicare spending and now account for 3.5% of GDP.
Because current market rates are well above the weighted average rate on outstanding debt, interest costs are expected to keep rising as debt rolls over. BofA modeled three scenarios in which interest rates rise by 1, 2, and 3 basis points for every 1 percentage point increase in the debt-to-GDP ratio. The initial effect is modest, it said, but long-run paths diverge clearly. The debt-rate-debt feedback loop is a slow and cumulative process rather than an immediate risk.
ECB may deliver a final 25 basis-point hike in September
BofA expects the European Central Bank to raise rates by 25 basis points in September, taking the deposit rate to 2.50%. Based on assumptions from mid-August, the bank said changes in the inflation outlook are limited. That leaves room for a third hike this year, but does not amount to a commitment.
The report said the ECB will likely have completed its current tightening cycle after the September move, with rate cuts beginning in 2027.
Energy prices remain the largest uncertainty. Using energy prices through Sept. 1, BofA said synthetic energy prices for 2027 would be nearly 5% above the June baseline. If the ECB’s alternative scenario shows 2027 inflation and terminal core inflation both 10 basis points above the June baseline, markets would read that as a stronger signal for a possible December hike.
Even so, BofA said the bar for a total of 75 basis points in hikes remains high and would require a sustained rise in energy prices.
UK outlook revised as energy shock remains in focus
BofA slightly raised its 2026 UK growth forecast to 1.2%, citing stronger-than-expected economic performance in the first half of the year. It cut its 2027 growth forecast to 1.2% because of higher energy prices and policy uncertainty ahead of the autumn budget.
The bank expects UK inflation to peak at 3.5% in November, above its previous forecast. On rates, BofA said it expects the Bank of England to stay on hold through 2026 and then cut by 25 basis points in November 2027, taking the policy rate to 3.50%.
At the same time, it said uncertainty tied to the energy shock keeps hike risk alive. The November, December, and February meetings are all still live. BofA added that market pricing for the next three hikes looks too hawkish.
Philippines and Central Europe face different constraints
In emerging markets, BofA said the Philippines’ fiscal deficit could widen to 6.1% of GDP in 2026, above the government’s previous 5.5% estimate. The report pointed to slower revenue growth of 6%, compared with the government’s 8% forecast, and weaker GDP growth of 2.5%, versus the government’s 3.5% to 4.5% expectation range.
Interest payments are also taking a larger share of the budget and are expected to reach 15% in 2026, the highest since 2014, according to the report.
In Central and Eastern Europe, BofA said the gas price shock is a real risk and that markets may be overpricing the scale of additional rate hikes. Pass-through from natural gas prices to consumer prices is slow and uneven, with a lag of 6 to 12 months and major cross-country differences.
- The Czech Republic is the most exposed to wholesale gas prices.
- Poland comes next.
- Hungary and Romania are partly shielded by administered pricing.
BofA expects the Czech central bank to deliver at most one more 25 basis-point hike in November, while Poland’s central bank is expected to keep rates unchanged.
A fragmented global picture
BofA’s broader view is that the global backdrop has no single unifying theme. The U.S. is dealing with a communication paradox and a debt path that is worsening gradually. Europe is close to what the bank sees as a final rate increase. The UK is waiting through an energy shock. Emerging markets are constrained by their own structural limits.
The article was compiled and interpreted from a third-party brokerage research report by Bank of America Securities dated Sept. 4, 2026, together with public market information. Any ratings, target prices, earnings forecasts, and related judgments cited in the piece are the views of the brokerage’s analysts and represent only the institution’s position, not the view of Chaoxiang Research, and do not constitute investment advice.
The report also said market decisions should be made independently and that the material should not be used as a basis for buying or selling any security.