Author: Li Jia, Wall Street News
On July 1, at the annual Central Banking Forum held by the European Central Bank in Sintra, Portugal, Waller once again clearly stated that the Federal Reserve will not provide forward guidance on the future path of interest rates. He hopes that policymakers can engage in full discussions based on the latest data at each policy meeting, rather than pre-announcing the policy direction to the market.
He said that U.S. inflation risks have eased somewhat over the past four weeks, and the supply expansion brought by AI may profoundly change the way the economy operates. The United States is at the center of this transformation, but whether AI will ultimately bring inflation or deflation should be determined by the central bank based on data.
Will Not Provide Any Interest Rate Forward Guidance
Waller stated that the Federal Reserve is "charting a new course" and will not signal interest rate moves in advance as it did in the past. He said:
"We will hold our next meeting in four weeks, and I hope we can have a real family debate at that time."
He reiterated that forward guidance is not the right policy tool for the current economic situation, and the Fed will continue to make decisions based on the latest economic data, rather than committing to a policy path in advance.
This means the Federal Reserve will rely more on real-time economic data, rather than releasing policy signals to the market in advance.
At the June policy meeting, the Federal Reserve unanimously decided to keep the federal funds rate unchanged in the range of 3.5%-3.75%. However, the latest dot plot shows that 9 out of 18 officials still expect at least one rate hike this year, and the market has largely priced in the possibility of at least one 25-basis-point hike before the end of the year.
However, Waller himself declined to reveal his own policy inclination, emphasizing only that future policy decisions will depend on the performance of the data.
AI Is Changing the Economy at an Unprecedented Pace
Waller discussed the impact of artificial intelligence on the macroeconomy at the forum. He stated that the rate of improvement in AI model capabilities shows clear exponential growth.
He pointed out that the expansion of supply capacity driven by AI will become a new variable that future monetary policy must focus on, as productivity improvements mean the economy can achieve faster growth with lower inflationary pressures.
However, he simultaneously acknowledged that there remains enormous uncertainty about how AI will impact the job market.
"There is still a serious question about when AI will truly start to affect employment."
He emphasized that the Federal Reserve must continue to achieve both of its statutory goals of maximum employment and price stability, and any policy adjustment needs to balance the two.
Inflation Risk Declines, But Whether AI Has an Inflationary Effect Remains to Be Seen
Waller said that U.S. inflation risks have declined over the past four weeks, meaning there has been a degree of easing in recent price pressures.
However, regarding the widespread market discussion on whether AI is a deflationary force or a new source of inflation, Waller did not give a clear answer. He said:
"Whether AI has an inflationary effect should be decided by the central bank."
In his view, AI can enhance production efficiency and expand supply on one hand, while also potentially stimulating new investment and demand on the other. Therefore, the final effect needs to be judged based on data, not predetermined conclusions.
Additionally, Waller noted that Federal Reserve policy not only affects the U.S. but also has significant spillover effects through global financial markets.
Reiterating Fed Independence: Policy Will Not Be Affected by External Pressure
In response to ongoing concerns about Federal Reserve independence, Waller once again made a clear response. He said:
"The Federal Reserve has long been independent, remains independent now, and you will not see any change in that."
This statement is also seen by the market as a response to recent calls by U.S. President Trump for the Fed to cut rates. Waller emphasized that the Fed will autonomously decide the appropriate policy path and will not alter decisions due to external political pressure.
The U.S. Faces a Great Opportunity for Productivity Enhancement
Besides monetary policy, Waller also focused on the long-term growth prospects of the U.S. economy that day.
He said that for the past four weeks, he has been focused on monetary policy work, and for the U.S., this is an era of great opportunity. Waller believes that the supply side of the U.S. economy remains strong, and the potential growth rate appears to be trending upward. Therefore, there is good reason to be optimistic about future productivity.
He said that if the economic performance of the past four quarters can serve as a reference for the future, then the U.S. economic outlook warrants optimism. He stated:
"The United States does not fear productivity-driven economic growth."
However, he simultaneously acknowledged that it is currently unclear whether productivity improvements will have a direct impact on short-term monetary policy, but the ongoing expansion of supply capacity will undoubtedly profoundly affect future policy formulation.
Unchanged Stance on Balance Sheet Reduction
Besides interest rate policy, Waller also discussed the Federal Reserve's balance sheet.
He said that his view on the balance sheet has not changed over the past four weeks. "It's no secret that I want the Federal Reserve's balance sheet to shrink."
However, he simultaneously stated that regarding what size the balance sheet should ultimately be, the Fed remains open-minded. Waller noted that balance sheet policy primarily works through asset prices; therefore, any significant decisions regarding the balance sheet will undergo public discussion and be collectively decided by the FOMC.
He also said that the current balance sheet size of about $6.7 trillion is still far above pre-pandemic levels, and even if balance sheet reduction continues, it cannot be completed in a short time. "18 weeks is far from enough."
Five Reform Working Groups to See New Progress
In fact, abandoning forward guidance is only part of Waller's push for Federal Reserve reform.
Last month, Waller announced the establishment of five internal special working groups, responsible for studying communication mechanisms, the balance sheet, data usage, productivity and employment, and the inflation framework, among other topics. He recently revealed that the list of members for the special working groups could be announced as early as next week.
Waller said these working groups will not only include internal Federal Reserve officials but will also invite external experts to participate, including some international figures from outside the United States. He hopes that through these reforms, the Fed's policy framework and communication mechanisms will be re-examined to make monetary policy better suited to the current rapidly changing economic environment.
