"Fed mouthpiece": Waller wants to reshape the Federal Reserve, but it's a "hell-level difficulty"!

Source: Jinse Finance

Nick Timiraos, a reporter from The Wall Street Journal known as the "Fed's mouthpiece," wrote that although Waller has systematically expressed his views on the Fed's responsibilities and mistakes through speeches, podcasts, columns, and media interviews over the past two decades, as he is about to officially take office as the Fed chair, both the market and Washington still find it difficult to accurately predict his future policy direction.

This uncertainty stems primarily from significant changes in the macroenvironment. Four years after inflation peaked, it has yet to fall back to the Fed's 2% target, and is now rising again due to the Iran conflict and tariffs. Over the past six months, the market's focus has shifted from rate cut discussions to reassessing the probability of rate hikes.

A year ago, Waller was still able to strike a balance between two positions: on one hand emphasizing the restoration of the Fed's credibility, and on the other, arguing that conditions for rate cuts were gradually being met. However, the energy shock disrupted this framework, making it difficult for his original logic to hold simultaneously.

Another constraint comes from the decision-making mechanism itself. Timiraos points out that in seeking the nomination, Waller mainly had to answer to US President Trump, who had made it clear he was unwilling to reappoint central bank leaders out of step with his own policy pace. But once officially in office, Waller will have to face the Federal Open Market Committee’s 18 members, who each bring different perspectives and experience; he can neither pick nor replace them.

Policy Philosophy and Reform Direction

Waller has long advocated for rebuilding central bank credibility to eventually achieve a lower interest rate environment. He believes that new ways to measure and forecast inflation are needed, and the Fed should reduce its direct intervention in markets, making central bank operations more restrained.

Nellie Liang, a former Fed economist who worked with Waller, said: “He has always maintained the view that the central bank should play a backstage role, keeping it away from political whirlpools that tend to attract all kinds of criticism.” She added, Waller focuses more on long-term policy paths than on short-term decisions at each meeting.

Regarding interest rates, Waller criticizes the Fed’s overreliance on models that see strong economic growth as a source of inflation, as well as on obviously lagging data indicators. He has explicitly rejected the “Phillips Curve” (which posits a short-term negative correlation between unemployment and inflation but no relationship in the long run), arguing that the root of inflation lies in excessive government spending rather than rising wages.

He has also questioned the current methods of inflation measurement, arguing that these indicators are merely “rough approximations” being given undue precision. Therefore, he proposes building a system based on real-time price changes of millions of goods to reflect inflation more dynamically.

Based on this approach, Waller emphasizes a core logic: As long as the public believes the Fed can maintain low and stable inflation, then energy shocks or tariff effects will only lead to one-off price changes rather than evolving into persistent inflation.

The Wall Street Journal quoted his remarks at a State Street Bank meeting last summer: “Like a battle-tested general, Eisenhower understood that only by being fully prepared for war can we avoid war. The same principle applies to fighting inflation.”

Balance Sheet and Communication Mechanism Controversies

Currently, the Fed’s balance sheet stands at about $6.7 trillion, around four times the share of the economy compared to when Waller first joined the institution in 2006. Expansion operations during multiple crises have not been fully unwound, due in part to changes in banking regulation and an increase in Treasury balances at the Fed.

Waller believes this situation has involved the Fed in market areas it should not enter, and to some extent supports government financing. He advocates, in today’s blurred fiscal and monetary environment, for redrawing the lines between the two with reference to the spirit of the 1951 Accord.

However, he does not favor drastic adjustments to the pace. At last month’s nomination hearing, Waller stated: “It took us 18 years to build such a huge balance sheet. There’s no way we could fix it in just 18 minutes.”

In policy communication, Waller also proposes changes. He thinks Fed officials talk too much about interest rate paths while their forecasts have performed poorly. “If you’re not good at doing something, you should do less of it,” he said last summer.

Timiraos points out that such reforms require broad support within the committee. The current chair Powell once tried to adjust the “dot plot” for displaying interest rate expectations, but the lack of consensus led to shelving the attempt.

Internal Divisions and Policy Implementation Challenges

Disagreements over Waller’s policy proposals have already surfaced within the Fed, with some officials cautious about the current framework even as they admit its shortcomings.

Boston Fed President Collins defended current tools in a recent interview, saying that it is “commonplace in history” for a new chair to propose different perspectives. Fed Governor Barr was more direct, stating that setting balance sheet reduction as a goal is “wrong” and warning that related mechanisms could undermine bank system stability.

Regarding interest rate prospects, Waller’s previous two key judgments—that artificial intelligence would lower inflation, and that balance sheet reduction could make way for more accommodative policy—were questioned by the committee before the energy shock appeared.

Former Philadelphia Fed President Harker bluntly stated: “Waller is in an exceptionally tough spot because he is destined to be unable to deliver the sweeping vision the president expects... There’s just absolutely no way they’ll cut rates this entire year. In the current circumstances, how could you possibly cut rates?”

Despite facing multiple constraints, Waller has stated he will set policy based on the actual economic situation. Those familiar with his style believe that he is unlikely to forcibly push through decisions lacking support, and will instead seek consensus on long-term unresolved issues.

Timiraos concludes by noting that Waller’s reform perspective is not limited to short-term policy tweaks. In a podcast interview with the Hoover Institution last year, he stated: “The Fed doesn’t need a revolutionary overhaul; what it truly needs is a certain degree of credibility restoration and a return to order.”