Waller, Two Thoughts on the Transmission of Monetary Policy

Waller at a Bank of Italy conference gives a methodology speech, not a policy speech: initial conditions matter more than historical averages, large shocks transmit nonlinearly, and forward guidance is a tool that can help or hinder. He offers no read on the current stance, no comment on the labor market or inflation today, and no rate path signal. The one live thread is his skepticism about forward guidance when scenarios diverge, which feeds the ongoing debate over Fed communication tools.

What’s new: Nothing material for the front end. Waller restates positions he has held since 2022 on vacancies-versus-unemployment and shortened policy lags. The mildly new bit is his framing on forward guidance: he says explicitly that in divergent-scenario situations it is less useful and sometimes best not used at all, and he calls the September 2020 liftoff guidance a mistake that tied the FOMC's hands. That is a communications-framework view, not a rate signal.

KEY FINDINGS

• No reference anywhere to current policy, the current level of the funds rate, or the near-term path. Zero information for December or 2026 pricing from a voter the desk watches for dovish tells.
• Waller says forward guidance is "more art than science" and that the September 2020 guidance "tied the hands of the FOMC in 2021 and unnecessarily delayed rate increases." A sitting governor on record against rigid guidance argues for less committal Fed communication, so expect statement language to stay meeting-by-meeting and scenario-dependent.
• The yellow-light analogy: with multiple plausible scenarios each requiring different paths, you cannot average them into a base case and guide off it. Read as a caution against taking the SEP median or any single dot path as a commitment, which keeps optionality premium in the front end.
• Repeats that the 2022-23 tightening pace shortened the usual lags and that vacancies, not layoffs, absorbed the labor demand hit. Consistent with Waller's prior framework and reinforces that he will lean on current-state data rather than historical rules of thumb, but adds nothing new to his reaction function.

FROM THE DOCUMENT

But forward guidance can impair policy transmission if the guidance is too strong or rigid.

In the end, this restrictive guidance tied the hands of the FOMC in 2021 and unnecessarily delayed rate increases.

One cannot simply take a weighted average of these scenarios as the "base case" and use it to give forward guidance.

So the takeaway is that forward guidance can help speed up policy transmission, but if it is not flexible enough, it can hinder policy transmission.