What happened
At the Istanbul Economic Forum, Governor Christopher J. Waller offered a brief update on the U.S. economy and central bank communication. He said that in September the Federal Open Market Committee (FOMC) voted to raise the policy rate 25 basis points to 3.75 percent to 4 percent after nine months during which it was held steady. He framed two linked questions: what comes next, and what changed. He said his September decision was the culmination of factors that developed over the past year rather than a response to a single data point.
What changed
Waller said that when the FOMC cut rates from September through December 2025, it did so with inflation fairly close to the 2 percent target after accounting for tariff effects. He described a weakening labor market then, with an increase in unemployment over the first eight months of the year and very low job creation, and noted official data were interrupted by the government shutdown that began on October 1. He viewed those cuts as insurance against an economic slowdown.
He said that over the first half of this year the labor market stabilized while progress on inflation stalled in part because the conflict in the Middle East drove energy prices very high. He noted core personal consumption expenditures (PCE) inflation moderated to 0.1 percent in June and an initial estimate of 0.2 percent in July, later revised to 0.1 percent. Other forces, he said, eroded his confidence: the conflict persisted, experts warned low inventories and damaged infrastructure could keep oil prices high through 2027, the artificial intelligence buildout was driving up high-tech consumer prices, projections for that buildout grew, and continuing trade conflicts threatened new tariffs. He said the first inflation reading for August came in hot just before the FOMC's September meeting.
On communicating the expected policy path
Waller said he would discuss a way of communicating the expected future stance of monetary policy that has the flavor of forward guidance but isn't forward guidance. He gave an example: suppose a majority of FOMC voters decide policy needs to be more restrictive and it is clear to the public that some tightening is likely. Policymakers and markets then need to determine the number of rate hikes and the pace of hikes. He illustrated options by assuming policymakers have in mind three 25 basis point hikes so that policy would ultimately be 75 basis points higher than it currently is.
First, he said, policymakers could choose to say nothing about the expected path of the policy rate. But that approach could surprise markets and create volatility. Without additional information, in an extreme case, markets could price in zero or even potentially five hikes in future meetings.
