Waller, The Economic Outlook and Some Comments on My Policy Communication

Waller lays out a two-sided reaction function skewed hawkish: hold if August inflation confirms disinflation, hike on September 15-16 if it does not. He calls policy only slightly restrictive and says it may not take much acceleration in inflation to push him toward tightening. Growth and the labor market are described as solid enough that they are not a constraint, so the September decision rests almost entirely on one CPI/PCE print.

What’s new: The live hike option is the new content. Waller explicitly names the September 15-16 meeting as a possible hiking meeting and puts a low bar on it: "it may not take much acceleration in inflation to nudge me into supporting tighter policy." Also new: his judgment that policy is only slightly restrictive, his dismissal of tariffs and energy as ongoing inflation sources, and his flag that a pending Commerce Department nonmarket services revision could mechanically cut 12-month PCE by a few tenths. The endorsement of no forward guidance alongside Chairman Warsh is confirmation rather than news.

KEY FINDINGS

• "But if inflation comes in hot, I would consider a rate hike" at the September 15-16 meeting, with the qualifier that it may not take much acceleration to get him there. Puts a genuine hike tail into September pricing from a member the market does not habitually read as the hawkish end.
• He judges "policy is currently only slightly restricting aggregate demand." Implies his estimate of neutral sits close to the current setting, so the bar for further tightening is lower and the bar for cuts is much higher than a 3.3 percent core would otherwise suggest.
• Three-month core is 3.05 percent, down from 4.76 percent in February, and he strips nonmarket services which he says accounted for roughly half the July core increase. He is grading on momentum, not the 12-month print, so a single benign August core reading is sufficient to lock in a hold.
• Tariff pass-through is described as largely complete and the feared energy bleed-through has not materialised. Removes the supply-shock excuse for looking through inflation: any August upside would be read as demand-driven and therefore actionable.
• Labor market explicitly sidelined: unemployment 4.1 percent, payrolls averaging 60k, "they are not a large factor in my determination of the appropriate setting of monetary policy." Payroll surprises should carry less weight than usual into September; the inflation print is the single trade.
• A pending change to how Commerce estimates trading-related fees "could lower 12-month PCE inflation by a few tenths of a percentage point." A statistical revision, not disinflation, may flatter the headline and complicate how the Committee reads the September data.

FROM THE DOCUMENT

If the incoming data for August show this improvement has been fleeting, then it may be appropriate to raise the policy rate when the FOMC meets on September 15 and 16.

But if inflation comes in hot, I would consider a rate hike.

I judge that policy is currently only slightly restricting aggregate demand, and it may not take much acceleration in inflation to nudge me into supporting tighter policy.

I agree with Chairman Warsh that forward guidance isn't appropriate now or in many other situations.