The disagreement between the two reflects the deeper contradictions in the Federal Reserve's communication reform.

Written by: Bao Yilong, Wall Street Journal

The Federal Reserve is currently engaged in a public debate over the way it communicates its monetary policy, with the core disagreement revolving around: How much forward guidance should the central bank provide to the market?

The Wall Street Journal mentioned that Fed Governor Waller expressed his views on the Fed's external communication during a Reuters-hosted event on Thursday, specifically outlining his stance. He stated that effective monetary policy communication should center around three objectives: the current policy stance, the outlook for policy, and forward guidance under specific circumstances.

Waller's explanation responded to the metaphor of "playing the game rather than watching the referee" previously put forward by new Chair Waller. Waller's original intention was to encourage investors to focus more on economic data trends, rather than fixating on the Fed's policy path itself, which has been widely interpreted as a clear rejection of forward guidance.

In contrast, Waller countered with a baseball metaphor regarding "good pitches," arguing that the market does not need a referee to make mechanical calls on every pitch, but must have a basic expectation framework of "what constitutes a good pitch and what constitutes a bad pitch."

Waller softened his position in his speech at last week's Jackson Hole symposium, more clearly emphasizing that the Fed will take action against inflation that exceeds its target, but still insists that the Fed cannot yet "provide a mechanistic, tested standard answer."

Jeffrey Schmid, President of the Kansas City Fed, was asked during the symposium whether he participated in the newly established Fed communication working group, to which he replied "not really," further indicating the limitations of internal coordination.

Waller's "Playing the Game" Logic: Downplaying Forward Guidance

The metaphor "focus on playing the game rather than watching the referee" presented by Waller in July pointed to questioning two types of tools: one is overly explicit reaction functions (for example, strictly adhering to a Taylor rule-type policy response), and the other is conventional forward guidance.

Waller's logic implies a judgment: Over-reliance on forward guidance could weaken the Fed's flexibility in responding to data and may put the central bank in a passive position when economic conditions change rapidly.

Waller had previously committed to reforming the way the central bank communicates with external parties, including eliminating forward guidance and reducing the number of speeches and official statements. This strategy faced criticism from bond investors in July, who argued that Waller failed to provide sufficient information on the economic outlook.

Waller holds a more reserved stance on this. His viewpoint aligns more with traditional central bank communication philosophy, which suggests that transparency itself has the functional value of stabilizing expectations and reducing market volatility.

He does not oppose granting judges some discretionary space, expressing agreement that forward guidance is not applicable at all times.

However, he believes that a completely vague policy framework is equally harmful to the market. His baseball metaphor emphasizes that market participants need to have a "rough outline" of the Fed's reaction function, which means understanding to what extent inflation or employment must deviate from targets before the Fed typically takes action.

He stressed that clearly communicating the policy direction to businesses and households helps provide the public with clearer expectations. Waller stated:

But when it is truly needed, I think it should be used.

The "Family Feud" Reflects Greater Uncertainty

Waller himself characterized this discussion as a "family dispute."

However, this debate is unfolding in the form of public speeches before the market, and its impact has exceeded the scope of internal discussions.

Meanwhile, the bond market is in a highly sensitive state. Global yields have risen to their highest levels since 2008.

U.S. Treasury Secretary Yellen announced an expansion of the long-term U.S. Treasury buyback program, triggering widespread discussion in the market about the boundaries of policy tools.

Waller's push for the Fed to reduce its balance sheet, combined with the aforementioned bond market pressures, has led to an increasingly urgent demand for clarity in the Fed's policy communication.

Until a unified communication framework is established within the Fed, investors may need to "play the game" while also "watching the referee"—after all, even the referees are still discussing where to draw the strike zone.