Written by: Zhao Ying, Wall Street Journal

The two inflation data set to be released soon will be a real stress test of Waller's credibility as the Chair of the Federal Reserve.

According to the latest report by The Wall Street Journal, economist Nick Timiraos, known as the "new Federal Reserve spokesperson," believes that Waller has made lowering inflation a core policy theme during his tenure at the Federal Reserve. However, a vague press conference following last month's meeting raised significant doubts in the market about whether he is truly willing to back up his strong statements with actions.

The July Consumer Price Index (CPI) and the Fed's preferred inflation measure, Core PCE, which will be released in the coming month, will directly determine whether the Fed officials choose to raise interest rates or remain on hold during the September meeting.

If the data comes in strong, Waller will face a dilemma: either raise rates to prove he stands by his words or maintain rates while enduring more internal dissent, which would make the credibility gap left by the July meeting even harder to bridge. If the data is mild, it would give him some breathing room to clarify policy ideas at this month's Jackson Hole annual meeting, rather than being forced to respond to market pressure.

Data Threshold: 0.2% is a Watershed

Economists expect the month-over-month rise in the July Core CPI to be 0.2%. Timiraos points out that equal to or below this level would indicate that the inflation trend aligns with the Federal Reserve's 2% target; exceeding this threshold would constitute a clear signal of policy pressure.

The CPI data will further feed into the inflation indicators that the Federal Reserve relies on more heavily, which will be announced later this month. Notably, the core inflation rate in the Fed's preferred measure had risen to 3.3% in June, significantly higher than 2.8% a year ago.

Nick Timiraos states that the current data is being closely watched because several officials' expectations have proven to be off. They originally anticipated that tariff impacts would be temporary, and that energy prices would fall as oil prices declined, allowing inflation to return to target without additional tightening of policy. However, these impacts not only persist but have compounded with the surge in technology equipment and software prices driven by the AI boom, making officials' forecasts increasingly difficult to justify.

Press Conference Blunders, Market Confidence Damaged

Nick Timiraos believes that Waller’s performance after the July meeting disappointed the market significantly. When asked whether he would respond with rate hikes if inflation does not decrease, his answer was vague and roundabout—implying that the rise in bond yields already partially substitutes for the tightening effects of monetary policy, and vaguely mentioning a possible redefinition of the Federal Reserve's inflation target.

The market's reaction was quite unusual: the yield on the 30-year U.S. Treasury bond rose during Waller's remarks and did not decline afterward. BNP Paribas Chief U.S. Economist James Egelhof stated that this trend is unusual around the time of a meeting, indicating that "the market’s perception of the Federal Reserve under Waller's leadership is undergoing some fundamental shift."

Former Pimco Chief Economist Paul McCulley bluntly stated that Waller tends to replace specific statements with macro principles, thereby limiting his own policy space. "He speaks too grandly and has, in practice, limited his options," McCulley said.

Rifts Emerging Internally, Dissenting Votes Increasing

After the meeting, out of the 19 officials present, 10—half of the voting members—publicly voiced their opinions in the following days to clarify the policy logic that Waller failed to clearly express at the press conference.

Currently, at least 6 voting members have publicly stated that if inflation does not improve, they might support eventually raising rates; among them, 3 had already voted in favor of immediate rate hikes at the July meeting.

Nick Timiraos indicates that some familiar with Waller acknowledge that the communication chaos caused by the July press conference needs to be repaired, and the Jackson Hole meeting may be a suitable opportunity. However, others believe that the market's reaction has been exaggerated—former Fed Vice Chair Donald Kohn pointed out that based on the market's inflation expectations indicators, the changes are not significant, stating, "The market's reaction is not as pessimistic as commentators have described. But you definitely don't want to walk into that press conference and get that result: long-term rates going up while short-term rates go down."

Clash Between Communication Philosophy and Real Pressure

Waller intended to change the Federal Reserve's communication style from the outset. He believes that informing the market in advance about the conditions and factors that trigger policy actions will instead bind the central bank's hands and interfere with a valuable signal—namely, the market's own judgment of economic trends. Reducing forward guidance, in his view, can provide a purer market reading.

However, Kohn raised questions about this: "If you don't articulate your thinking framework, how do you know when your judgments are unproven?"

From a scheduling standpoint, if the September meeting chooses not to raise rates, the next meeting will be held just days before the midterm elections—at which point officials may be reluctant to raise rates for the first time during an election-sensitive period. This means that if the September window is missed, the decision will effectively be postponed until December, and by then, the inflation forecast that even Waller's colleagues struggle to maintain will need to support this waiting decision.