#夏日创作营 Waller spoke for two consecutive days—what exactly should the market take away?

Inflation hasn’t announced it’s over, and AI capital expenditure hasn’t hit the brakes either. Waller hasn’t issued a rate-hike alert, nor has he sounded the signal for rate cuts. What he really wants to tell the market is this: inflation is improving, but there’s no reason to celebrate yet; AI investment is accelerating, and that will help keep the U.S. economy resilient.

On July 14 and 15, Waller appeared on Capitol Hill for two straight days: on the first day before the House Committee on Financial Services, and on the second day after moving to the Senate Banking Committee. Both hearings ran long and featured many questions. But if you remove the repetitive parts, the main thread isn’t complicated. Here’s a small detail first: the two days submitted the same written testimony. So, look at the underlying judgments he emphasized again and again, and then see what genuinely new information is worth the market’s attention in the live Q&A.

I. Inflation is cooling, but Waller won’t pop the champagne early
The CPI and PPI released around the hearings were milder than the market had been worried about. If you swapped in a Fed chair who was more willing to calm the market, they might have used the moment to say a few words like “the progress is encouraging.”

Waller, of course, also acknowledged the data is moving in the right direction—but he hit the brakes quickly. “Someone might look at this morning’s data and say, the job is done, everything is fine. But that is not how I see it.”

At the Senate, he put it even more precisely: “These indicators can’t perfectly reflect the true state of underlying inflation.” In market language, this means: the data is indeed getting better, but a month of CPI and PPI is not enough to prove inflation has been fully brought under control. What Waller cares more about is whether core inflation, service prices, wages, and inflation expectations can all cool down together for several consecutive months. So his underlying stance is still hawkish. In his formal testimony, he said the Fed “has no tolerance for persistently elevated inflation.” However, a hawkish target doesn’t equal immediate rate hikes—between the two is still an entire set of data.

II. What truly interests him is capital expenditure still accelerating
If I had to remember just one economic variable from Waller’s two days of remarks, I wouldn’t pick CPI—it would be business capital expenditure. “The most striking feature of the economy right now is business investment.” His testimony highlighted two standout numbers: as of Q1, equipment investment was up about 8% year over year, and within that, high-tech investment grew by nearly 25% in Q4. Data centers, chips, servers, software, and power infrastructure are forming the most important incremental force in the U.S. economy. This also helps explain why the U.S. economy has not shown a clear recession for so long: consumption may not be especially strong, and real estate is relatively weak, but large tech companies’ investment is still keeping the economy going. As long as this round of capital spending doesn’t clearly hit the brakes, the Fed doesn’t have an urgent reason to cut rates to save the economy.

For the market, what’s truly worth watching next isn’t only the monthly inflation print, but also large tech firms’ earnings, data center buildout plans, and capital expenditure guidance for the second half of the year. Especially as August approaches, new guidance from companies may matter more than a single month’s CPI in shaping the market’s views on growth and interest rates.

III. Will AI push prices higher?
Waller made an important distinction: AI investment isn’t free. Data centers need to buy chips and equipment, consume power, and compete for engineering and technical talent. When demand surges in a concentrated way, related prices can easily rise. Waller acknowledged at the Senate that AI investment could push up some “measurable prices” over the coming year. But he added immediately: “I do not think a one-time change in prices necessarily constitutes inflation.”

That distinction is crucial. Chips can rise once due to supply-demand tightness—those are relatively one-off price changes. The central bank worries is when the price increases spread into wages, services, and inflation expectations, forming cycle after cycle—then you’d get persistent inflation.

Waller’s logic is: AI capital expenditure will increase demand in the short term, but in the long run it may improve productivity and expand supply. Whether it ends up as inflation or lower costs depends not only on supply response, but also on whether the Fed deals with potential demand overheating in a timely way.

IV. AI and jobs: optimistic, but he didn’t say it all
On employment, Waller was generally more optimistic than the market expects. He believes that building data center and AI infrastructure will require substantial investment in the near term, and that will also drive hiring across industries such as engineering, chips, software, and power. “In the short term, AI investment has a positive effect on employment.” “Over the long term, AI is expected to become a net creator of jobs.” Still, he admitted the technology transition won’t be frictionless. Some jobs will be replaced, and some roles will be redefined. When the productivity gains from AI actually translate into higher wages remains a “puzzle.” That suggests the Fed won’t loosen policy early just because “AI might cause unemployment.” At least for now, what Waller sees is capital expenditure driving jobs, not AI triggering mass layoffs.

V. Rate hikes or rate cuts next? He just won’t say
In both hearings, lawmakers kept pressing the same question: what exactly comes next? Waller’s answer stayed consistent—no rate guidance. “If I tell you today what the meeting in two weeks is preparing to do, we might only want to accept information that fits existing judgments and reject information that doesn’t.” That’s his rationale for weakening “forward guidance.” Once the Fed hints at hikes or cuts in advance, it could end up binding itself to commitments, and the market would treat every sentence like a trading password.

The problem is: the market can’t stop guessing. Less guidance means a single future economic data release could trigger bigger moves in U.S. Treasury yields and volatility in equities. Waller talking less doesn’t mean the market will be calmer—often, the opposite is true. Putting together the two days of remarks and the latest inflation data, the probability of immediate rate hikes in late July has clearly declined. But with inflation still above the 2% target, the economy not in recession, and AI investment continuing to expand, there are also not enough reasons for rate cuts recently. The most reasonable baseline scenario is still to hold steady and keep observing.

VI. On Fed reform, and the market’s focus on balance sheet reduction. Beyond rates, Waller is also preparing to re-examine the Fed itself.
He set up five working groups to study communication methods, the balance sheet, economic data, AI and jobs, and the inflation framework. It sounds like a comprehensive check-up after a new leader takes office. The balance sheet is what the market cares about most.

Waller has long believed that after a crisis ends, the Fed shouldn’t keep holding an excessively large bond portfolio for the long term. But this time, first he reassured the market: “Any changes will be discussed thoroughly, explained publicly, and ensure the market can understand them.”

In other words, a balance sheet of about $6.8 trillion can’t shrink back overnight. Even if adjustments are made to Treasuries and MBS holdings or to the ample-reserves regime in the future, there will be prior communication. For the short term, there’s no need to worry about a “sudden balance sheet contraction.” Over the medium to long term, though, investors should watch whether Treasury term premia may rise. Still, his intent is to look for opportunities to reduce the balance sheet. After this news broke, U.S. markets fell on the 15th. Tech stocks that had rallied earlier and were trading at rich valuations continued to plunge.

VII. Under political pressure, he gave a very “central-banking-style” answer
Lawmakers also asked what he would do if Trump demanded rate cuts. He didn’t directly say, “I would refuse the president,” but used an answer very typical of a central bank: “I will follow the law, and I will follow the data.”

That answer is fine in principle, but it still leaves room. At the Senate hearing, he also didn’t confirm whether he had spoken with Trump after becoming chair. The market’s questions about Fed independence won’t disappear completely because of a single hearing; they can only be verified through future real interest-rate decisions. At least based on what we’ve seen over these two days, Waller hasn’t leaned into the White House by signaling immediate cuts. Instead, he repeatedly emphasized the inflation goal and policy discipline—somewhat showing the market that he isn’t here to press a “rate cut button.”

So what should the market understand in the end?
Compressing the nearly six hours of hearings into a summary, there are four takeaways:
First, the inflation trend is improving, but the Fed is not ready to declare victory.
Second, the near-term risk of rate hikes is falling, but that doesn’t mean the rate-cut window is already open.
Third, the most important support for the U.S. economy is still capital expenditure driven by AI; as long as investment keeps growing, it’s hard for the economy to quickly lose momentum.
Fourth, the real policy turning point will only come when persistent inflation, jobs, and business capital expenditure all deliver clearer signals at the same time. Therefore, these two days of remarks are neither a “rate-hike alarm” nor a “rate-cut trumpet.” More precisely: short-term tail risks have decreased, but the market still needs to wait for capital expenditure and the inflation trend to provide the answer.

Waller isn’t willing to write the next-step script for the market. Next, U.S. Treasury yields, tech stocks, and global risk assets will likely have to find their own way through the data.