Federal Reserve Governor Christopher Waller has a message for anyone trying to decode the Fed’s next move: stop reading the tea leaves and start reading the data.
Speaking at a Bank of Italy conference on July 6, Waller argued that he doesn’t need to say much about where rates are headed because he has a clearly defined reaction function. In English: if you know what economic indicators he’s watching and how he’ll respond to them, you already know what he’s going to do.
Forward guidance is more art than science
Waller’s core thesis is deceptively simple. Forward guidance, the practice of central bankers telegraphing future rate decisions, works best when it stays flexible. Lock it into rigid commitments and you get problems.
He pointed to a specific historical example. The FOMC’s 2020 statement tied rate liftoff to specific inflation thresholds, and when prices surged in 2021, that rigid language created a bottleneck. The Fed found itself boxed in by its own words while inflation ran hot.
