In the face of tonight's questioning from lawmakers, Wall Street does not expect this newly appointed Fed chair, who refuses to provide any outlook, to give clear answers but merely seeks his views on the economy.

Source: Jinshi Data

On July 2, Fed Chair Waller publicly stated that he would not provide forward guidance, and then added, "I can update one piece of information: we will meet in four weeks." When talking about discussions at that time, he also said, "I hope we can have a wonderful 'family quarrel'... when we walk into that room and close the door, we will have a full debate, but beyond that, I cannot provide more information."

This way of expressing will be the backdrop for his congressional hearing this week. Under legal requirements, the Fed Chair must testify twice a year before Congress; Waller will appear this week in front of the House Financial Services Committee and the Senate Banking Committee, with times set for 10 PM Beijing time on Tuesday and Wednesday, respectively.

Lawmakers are expected to continuously press on the economy, inflation, and interest rate outlook, but based on Waller's recent public speeches, they are likely to struggle to obtain clear answers. Even when he reiterated the Fed's commitment to lowering inflation at a forum in Portugal, he still refused to provide specifics on the current economic situation or the interest rate path.

The Fed submitted its semiannual monetary policy report to Congress last Friday. The report states that amidst still elevated inflation, the Fed "will achieve price stability," which is the core policy message released by the Fed to lawmakers before Waller's first congressional testimony.

Since the beginning of this year, U.S. Treasury yields have continued to rise, with the market having priced in higher interest rate expectations. The report also mentioned that with inflation rising, the level of the federal funds rate corresponding to a quantitative policy rule employed by the Fed is above the current target range of 3.5% to 3.75%.

However, the report also specifically warned against mechanically interpreting this rule. "However, the prescriptions shown here ignore the fact that if the policy interest rate follows a specific path set by the rule, the evolution of the economy will be different; therefore, these prescriptions should be interpreted with caution," the report stated.

On Tuesday, the U.S. will also announce the latest inflation data, which means Waller may face inquiries about the CPI on the day he testifies in the House. The market expects that due to falling oil prices, the year-on-year increase in the June CPI will be 3.8%, down from 4.2% in May; excluding food and energy, the year-on-year core CPI is expected to slightly decrease from 2.9% to 2.8%.

However, even if the data is released on the same day, following Waller's recent communication style, he is likely to avoid making clear comments on that data.

Disagreement on Interest Rates and "Reaction Function" Debate

The minutes from the June policy meeting show that most Fed officials believe there are two potential paths for interest rates this year, with the dividing line being whether inflation cools. If inflation subsides, interest rates could be maintained at current levels, even lowered in the future; if inflation remains stubbornly high, further rate hikes may be necessary.

The minutes also present a more constrained scenario: if demand related to artificial intelligence remains strong, conflicts in the Middle East continue, or tariff impacts persist, while inflation remains high with a stable labor market, nearly all officials believe that "some tightening of policy" will be necessary, meaning rate hikes.

But for the outside world, the real uncertainty is not just whether interest rates may rise or fall, but how Waller himself will respond to economic changes. The concern is about the Fed Chair's "reaction function," which refers to how the central bank will adjust its policies when the economy deviates from expectations, rather than a pre-committed interest rate path.

Andrew Sacher of Bloomberg Economics differentiates this: "Forward guidance tells the market what the central bank thinks its path will be. The reaction function, on the other hand, tells the market how the central bank will respond to unexpected circumstances without providing an expected path."

Richard Berner, a professor at New York University who served on the Fed's research team in the 1970s, stated: "Good communication conveys the Fed's reaction function, which is the relationship between economic conditions and the path of the policy interest rate. And this is what is truly essential." He also emphasized, "This is different from forward guidance."

The debate surrounding this issue has extended from the market to within the Fed. Last week, Fed Governor Waller, while speaking in Rome, made a deliberate distinction between providing forward guidance and explaining how policy reacts under different economic conditions. He stated that the latter could reduce uncertainty faced by markets and households, "which would make everyone's life better."

Waller himself clearly emphasizes minimizing forward signals. On July 1, while participating in a forum with other central bank governors in Portugal, he defended his communication style citing the performance of the bond market. He said, "Volatility has not increased but is decreasing." He then added, "So I hear these comments, as if people do not understand. I think they actually understand very well."

Not all observers accept this judgment. Michael Feroli, Chief U.S. Economist at JPMorgan, believes that if Waller continues to remain silent, he might cede the leadership of the Fed's communications to other policymakers. Feroli stated, "He has not yet demonstrated any control over the current economic situation. We can only turn to other Fed officials to understand their interpretation of the economy."

The Fed spokesperson declined to comment.

What Other Questions Will Waller Face?

Besides inflation and interest rates, Waller may also face questions about central bank independence at the hearing. Last week, when asked whether the Fed would take necessary measures to control inflation regardless of whether Trump preferred low interest rates, Waller responded, "We have long been an independent central bank, and there will be no change in that aspect."

Artificial intelligence is also expected to be one of the focal points of questioning by lawmakers. Last week, when asked whether AI would exacerbate inflation, Waller did not provide a clear judgment but stated that the impact of AI on the demand side of the economy is already being seen, and he "believes we will also see its effects on the supply side at some point."

He mentioned that upon taking office as Fed Chair, he stated that AI could enhance productivity and lower inflation, thus creating conditions for rate cuts. Waller has also appointed five special task forces to study the Fed's public communication, balance sheet policies, the quality of existing data sources, how the central bank views inflation, and how AI will impact productivity and employment. The semiannual monetary policy report noted that these areas may affect how policy is implemented in the future.

Waller's communication strategy has also been reflected in institutional arrangements. In June, when policymakers submitted quarterly economic and interest rate forecasts used to form the so-called "dot plot," Waller did not participate; the length of the post-meeting statements was noticeably shortened, and the minutes of the meeting released three weeks later were also condensed. Waller received some support from attendees regarding the compression of post-meeting statements, as some officials welcomed a re-examination of the Fed's communication practices. In the context of rising economic uncertainty, other officials have recently mentioned the need to reduce forward guidance for investors.

However, this support is not unconditional. If the new communication approach makes it harder for the outside world to understand how the Fed judges the economy and adjusts policies accordingly, support may weaken. Waller stated in Rome that maintaining clarity on the reaction function is "one of the most critical lessons" learned from the operation of central banks over the past thirty years.

This controversy also reminds many seasoned observers of an earlier period at the Fed. Lou Crandall, Chief Economist at Wrightson ICAP, recalled that when he began his career in the 1980s, the Fed would not even publicly communicate its interest rate decisions, "that was an absurd chaos."

Greenspan gradually expanded communication with the market, but even so, his wording was often ambiguous, leading investors to bet on minute clues, including the thickness of his briefcase when attending policy meetings. Crandall stated, "Many people in the market have their own unique insights into what the Fed is thinking and make a big deal out of that. When the Fed does not attempt to outline its own views — it does not need to be absolutely certain but must have some clarity — this kind of theory will run rampant."

Former Fed Vice Chair Don Kohn believes that it is understandable for the new chair to take some time to clarify his thoughts, but this state will not last indefinitely. He said:

“At some point, he will have to provide a more detailed economic view, tell us his thoughts, and how that aligns with the committee's perspective. I suspect this situation will not continue forever.”