New Federal Reserve Communications: Waller's Tough Talk Can't Overcome Data, Two Inflation Reports May Determine September Rate Hike Fate

Nick Timiraos believes that the two upcoming inflation data will serve as a credibility test for the new Federal Reserve Chair Waller.

Written by: Zhao Ying, Wall Street Journal

The two inflation reports set to be released soon will serve as a real stress test for the credibility of Federal Reserve Chair Waller.

According to the Wall Street Journal's latest report, economic reporter Nick Timiraos, known as the "New Federal Reserve Communications Agency," believes that Waller has consistently made lowering inflation a core policy theme during his tenure at the Fed. However, a vague press conference following last month’s interest rate meeting raised significant doubts in the market about whether he genuinely intends to back up his tough rhetoric with action.

The upcoming releases of the July Consumer Price Index (CPI) and the Fed's preferred inflation measure, the core PCE, will directly determine whether Fed officials choose to raise rates or maintain the status quo at the September meeting.

If the data comes in hot, Waller will face a dilemma: either raise rates to prove he follows through on his words or maintain rates amid increasing internal dissent, making it even harder to mend the credibility cracks left by the July meeting. If the data is moderate, it could buy him some breathing room and allow him to proactively clarify his policy thinking at this month’s Jackson Hole annual meeting, rather than being forced to respond to market pressures.

Data Threshold: 0.2% is the Watershed

Economists expect the month-on-month increase in the July core CPI to be 0.2%. Timiraos points out that a figure equal to or below this level would indicate that inflation trends are in line with the Fed's 2% target; exceeding this threshold would signal significant policy pressure.

The CPI data will further feed into the Fed's more relied-upon inflation measure, which will be released later this month. Notably, the core inflation rate in the Fed's preferred inflation measure rose to 3.3% in June, significantly higher than the 2.8% a year ago.

Nick Timiraos states that the current data is under close scrutiny because several officials' previous predictions have proven inaccurate. They initially expected that tariff shocks would be one-off events, and energy prices would fall with oil prices, allowing inflation to return to target without further tightening of policy. However, these shocks have not only persisted but have also been compounded by soaring prices of technology equipment and software driven by the AI boom, making officials' forecasts increasingly difficult to justify.

Press Conference Missteps, Market Confidence Damaged

Nick Timiraos believes that Waller's performance after the July interest rate meeting disappointed the market. When asked whether he would respond to inflation not falling by raising rates, his answer was vague and circuitous—implying that rising bond yields have, to some extent, replaced the tightening effect of monetary policy, and vaguely mentioning a possible redefinition of the Fed's inflation target.

The market's reaction was quite rare: the yield on the 30-year U.S. Treasury bond rose during Waller's remarks and has not retreated since. BNP Paribas Chief U.S. Economist James Egelhof stated that such a trend is unusual around interest rate meetings, suggesting that "the market's perception of the Fed under Waller's leadership is undergoing some more fundamental change."

Former Pimco Chief Economist Paul McCulley bluntly stated that Waller's tendency to replace specific statements with macro principles has actually constrained his policy options. "He talks too grandly, which has practically limited his options at the operational level," McCulley said.

Internal Divisions Emerge, Dissenting Votes Rise

After the meeting, 10 out of the 19 officials present—half of the 12 voting members—publicly voiced their opinions in the following days, actively supplementing the policy logic that Waller failed to clarify at the press conference.

Currently, at least six voting members have publicly stated that they may support a rate hike if inflation does not improve; three of them had already voted for an immediate rate hike at the July meeting.

Nick Timiraos notes that some who know Waller acknowledge that the communication confusion caused by the July press conference needs to be repaired, and the Jackson Hole annual meeting may be a suitable window for this. However, some believe the market's reaction has been exaggerated—former Fed Vice Chair Donald Kohn pointed out that based on market inflation expectations, changes have not been significant, stating, "The market reaction is not as pessimistic as commentators describe. But you also don’t want to walk into that press conference and get that result: long-term rates rising, short-term rates falling."

Collision of Communication Philosophy and Real-World Pressure

From the outset of his tenure, Waller intended to change the Fed's communication style. He believes that preemptively explaining the conditions and factors that trigger policy actions would instead bind the central bank's hands and disrupt a valuable signal—the market's own judgment of economic trends. Reducing forward guidance, in his view, can provide a purer market reading.

However, Kohn questioned this: "If you don’t clarify your thinking framework, how do you know when your judgment fails to be validated?"

Looking at the schedule, if the September meeting opts not to raise rates, the next meeting will take place just days before the midterm elections—when officials may be reluctant to initiate a rate hike 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 find hard to uphold will need to support this waiting decision.