Waller’s new policy signal: stresses zero tolerance for high inflation but does not hint at the rate path

Original title: “Waller’s hearing debut sends new policy signals,” “New Fed Communication Agency”: emphasizes zero tolerance for high inflation but does not imply a rate path

Original author: Li Dan, Wall Street News

The “debut” of Federal Reserve Chair Waller’s congressional monetary policy hearing rolled out his “new Fed policy declaration.” It did not provide the market with signals it most cares about—rate cuts or hikes. Instead, he repeatedly emphasized restoring price stability, maintaining the Fed’s independence, and promised that any future adjustments to the balance sheet will be communicated in advance and sufficiently.

Nick Timiraos, a reporter dubbed the “New Fed Communication Agency,” believes Waller deliberately avoided offering any hints about the future rate path that day, and instead focused the hearing on reiterating the Fed’s long-term goal of controlling inflation.

Just before the hearing began, the U.S. released the June CPI, which came in below market expectations and briefly pushed markets to bet more aggressively that the Fed would ease policy sooner. However, Waller downplayed the importance of that data, saying he does not believe the inflation mandate has been completed.

Timiraos pointed out that Waller did not use that inflation data to release any future policy leaning, nor did he disclose the rate path for the July FOMC meeting or afterward. Rather, he kept stressing that the Fed has two policy tools—interest rates and the balance sheet—and in the future it will decide how to use these tools based on economic data to achieve the price stability goal.

Bloomberg, meanwhile, believes the multi-hour hearing effectively outlined the policy framework of the “new Fed”: sticking to monetary policy independence, adhering to the 2% inflation target, rejecting the idea that employment and inflation can only be a choice between the two, while leaving room for future balance sheet reform and central bank governance reform.

Under the influence of Waller’s more hawkish remarks, U.S. Treasury yields gave back part of the decline that followed the CPI release during Waller’s hearing. The U.S. dollar index narrowed about half of the drop after the CPI release.

Five signals: Waller’s first congressional hearing outlines the policy framework of the “new Fed”

· Reiterates “zero tolerance” for persistent high inflation, asserting that a single CPI drop is not enough to declare the victory over disinflation

In the hearing, Waller emphasized the Fed’s “zero tolerance” for persistent high inflation. He said the Fed has failed to achieve the 2% inflation target for years, so restoring price stability remains the most important policy task at present.

In response to the June CPI data released that day, which clearly came in below market expectations, Waller said: “Someone might say, (inflation) accomplished (Mission accomplished), and I don’t see it that way.”

Timiraos believes Waller repeatedly reiterated the long-term inflation goal that day, without adjusting his policy stance due to improvements in a single month of data. This highlights his desire to avoid markets interpreting a single inflation print as a signal that monetary policy is about to turn.

· Did not reveal any rate path, emphasizing that future actions will still be decided by data

For the next rate action the market cares about most, Waller remained restrained throughout.

Timiraos noted that Waller did not imply a policy direction for the next several meetings of the Fed’s Federal Open Market Committee (FOMC), nor did he answer the market’s question about when rates might be adjusted. Instead, he emphasized that the Fed has two policy tools—an interest rate policy and a balance sheet policy—and will assess whether and how to use these tools based on future economic data.

However, Waller also disclosed that over the coming period he will discuss with his FOMC colleagues whether and when policy tools would need to be used, and he described that there could be a “family fight” at that time.

Bloomberg believes these remarks mean that although Waller did not give explicit policy guidance, his overall wording still leans hawkish—indicating that until inflation is confirmed to be consistently returning to target, he is not willing to easily release easing signals.

· Employment and inflation are not an “cruel choice” between the two

When asked by lawmakers about the Fed’s dual mandate, Waller denied that there is a so-called “cruel choice.”

He said that as long as price stability is restored, the U.S. economy can continue to grow, and businesses can continue to expand hiring. Therefore, controlling inflation and achieving full employment are not conflicting—they reinforce each other.

This further strengthens his policy philosophy: stabilizing prices is itself the foundation for long-term employment growth and economic prosperity.

· Balance sheet reform will be previewed in advance, not suddenly shock the market

Balance sheet reform has long been an important reform topic since Waller took office.

But at this hearing, he said he does not want to pre-judge the conclusions of the balance sheet reform working group that is currently underway.

At the same time, he pledged that if the Fed adjusts balance sheet policy in the future, it will communicate sufficiently with the market in advance to ensure investors have adequate expectations, rather than taking action suddenly.

Waller again emphasized that the Fed’s balance sheet should serve monetary policy, not take on the function of fiscal policy.

Reuters believes this statement helps ease market concerns that the next round of balance sheet contraction reform might be pushed forward too quickly, and also implies that the Fed will place greater emphasis in the future on policy communication and managing market expectations.

· Sticks to monetary policy independence, receiving positive responses from some lawmakers across party lines

In response to lawmakers’ questions, Waller again stressed that the Fed will remain independent when formulating monetary policy, and he pledged that setting interest rates will not be swayed by political factors.

Senior congressional reporter Steve Dennis believes that amid Trump’s ongoing public pressure on the Fed to cut rates, some Democratic lawmakers have chosen to openly support Waller’s stance on protecting central bank independence. This also reflects a subtle shift on this issue across party lines.

Waller’s hearing strengthens the communication framework where data determines policy

How does the market see Waller’s hearing? Overall, his remarks did not change the outlook for near-term interest rates, but they reinforced a new communication framework of “data determines policy.”

Timiraos believes the biggest feature of Waller’s hearing is not that it released new policy signals, but that it deliberately did not release any signal about the interest rate path.

Facing a CPI report that came in below expectations, Waller did not discuss in a follow-through manner whether to cut rates next, nor did he provide any forward-looking guidance. Instead, he kept outlining his remarks around restoring price stability, Fed independence, and policy tools—continuing his communication approach since taking office to avoid commitments based on a single data print or a single meeting.

Bloomberg, meanwhile, believes the hearing further sketches the policy tone of the Fed under Waller: continuing to prioritize price stability, advancing balance sheet and central bank governance reforms, and managing market expectations through more transparent communication.

For investors, this means Fed policy in the future will remain highly dependent on data performance rather than a pre-set rate path. The market will also focus more on how Waller over the next few months will translate this idea into the actual decisions at FOMC

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