Wosh: Inflation has cooled in recent weeks, AI is reshaping the economy, and forward guidance has lost its necessity

Author: Li Jia, Wall Street Journal
On July 1, at the annual central bank forum held by the European Central Bank in Sintra, Portugal, Waller reiterated that the Federal Reserve will not provide forward guidance on future interest rate paths, hoping that decision-makers can engage in thorough discussions based on the latest data at each meeting, rather than pre-announcing policy directions to the market.

He stated that the inflation risks in the U.S. have eased over the past four weeks, and the supply expansion brought about by AI could profoundly change the way the economy operates. The U.S. is at the center of this transformation, but whether AI will ultimately lead to inflation or deflation should be judged by the central bank based on data.

No Forward Guidance on Interest Rates

Waller stated that the Federal Reserve is "paving a new path" and will not hint at interest rate directions in advance as it did in the past. He said:

"We will hold our next meeting in four weeks, and I hope everyone can engage in a real family-style debate."

He emphasized again that forward guidance is not the correct policy in the current economic situation, and the Federal Reserve will continue to make decisions based on the latest economic data rather than pre-committing to a policy path.

This means that the Federal Reserve will rely more on real-time economic data rather than releasing policy signals to the market in advance.

At the June meeting, the Federal Reserve unanimously decided to keep the federal funds rate unchanged in the range of 3.5%-3.75%. However, the latest dot plot shows that among the 18 officials, 9 expect at least one rate hike this year, and the market has essentially priced in the possibility of at least one 25 basis point hike before the end of the year.

However, Waller himself refused to disclose his policy preferences, only emphasizing that future policy decisions will depend on data performance.

AI is Changing the Economy at an Unprecedented Speed

Waller discussed the impact of artificial intelligence on the macroeconomy at the forum. He noted that the capabilities of AI models are showing a clear exponential growth.

He pointed out that the supply capacity expansion driven by AI will become a new variable that monetary policy must focus on in the future, as productivity improvements mean the economy can achieve faster growth under lower inflation pressure.

However, he also acknowledged that there is still significant uncertainty about how AI will affect the job market.

"There are serious questions about when AI will truly start to impact employment."

He emphasized that the Federal Reserve must continue to achieve both full employment and price stability as its dual statutory goals, and any policy adjustments need to consider both.

Inflation Risks Have Decreased, but Whether AI Has Inflationary Effects Remains to be Seen

Waller stated that the inflation risks in the U.S. have decreased over the past four weeks, indicating a certain degree of easing in recent price pressures.

However, regarding the widely discussed question of whether AI is a deflationary force or a new source of inflation, Waller did not provide a clear answer. He said:

"Whether AI has inflationary effects should be determined by the central bank."

In his view, AI can enhance production efficiency and expand supply on one hand, while also potentially stimulating new investment and demand on the other, so the ultimate effect needs to be judged based on data rather than preset conclusions.

Additionally, Waller pointed out that Federal Reserve policy not only affects the U.S. but also has significant spillover effects through global financial markets.

Reaffirming the Independence of the Federal Reserve: Policy Will Not Be Influenced by External Pressures

In response to ongoing concerns about the independence of the Federal Reserve, Waller made a clear statement. He said:

"The Federal Reserve has long maintained its independence and will continue to do so; you will not see any changes."

This statement was also seen by the market as a response to U.S. President Trump's recent calls for the Federal Reserve to cut interest rates. Waller emphasized that the Federal Reserve will decide on the appropriate policy path independently and will not change its decisions due to external political pressure.

The U.S. is Facing a Huge Opportunity for Productivity Improvement

In addition to monetary policy, Waller also focused on the long-term growth prospects of the U.S. economy.

He said that over the past four weeks, he has been focused on monetary policy work, and the current period is one filled with great opportunities for the U.S. Waller believes that the supply side of the U.S. economy remains strong, and the potential growth rate appears to be on an upward trend, providing ample reason to remain optimistic about future productivity.

He stated that if the economic performance of the past four quarters can serve as a reference for the future, then the outlook for the U.S. economy is worth maintaining optimism. He said:

"The U.S. is not afraid of productivity-driven economic growth."

However, he also acknowledged that it is currently unclear whether improvements in productivity will have a direct impact on short-term monetary policy, but the continued expansion of supply capacity will undoubtedly have a profound impact on future policy-making.

No Change in the Stance on Balance Sheet Reduction

In addition to interest rate policy, Waller also discussed the Federal Reserve's balance sheet.

He said, "My views on the balance sheet have not changed over the past four weeks. It is no secret that I hope the Federal Reserve's balance sheet will shrink."

However, he also stated that the Federal Reserve remains open to how large the balance sheet should ultimately be. Waller pointed out that balance sheet policy primarily works through asset prices, so any significant decisions regarding the balance sheet will undergo public discussion and be collectively decided by the FOMC.

He also mentioned that the current balance sheet size of approximately $6.7 trillion is still far above pre-pandemic levels, and even if the balance sheet continues to shrink in the future, it cannot be completed in a short time, "18 weeks is far from enough."

Five Reform Working Groups Will Make New Progress

In fact, abandoning forward guidance is just one part of Waller's push for reform at the Federal Reserve.

Last month, Waller announced the establishment of five internal special working groups, each responsible for studying communication mechanisms, the balance sheet, data usage, productivity and employment, and the inflation framework. He recently revealed that the member list of the special working groups will be announced as early as next week.

Waller stated that these working groups will not only include Federal Reserve officials but will also invite external experts to participate, including some international individuals from outside the U.S. He hopes that through these reforms, the Federal Reserve's policy framework and communication mechanisms can be re-examined to make monetary policy more adaptable to the rapidly changing economic environment.