Facing questioning from lawmakers tonight, Wall Street does not expect the Federal Reserve's new chair— who has refused to offer any forward guidance—to provide clear answers, and only hopes he will share his views on the economy.
On July 2, Federal Reserve Chair Wosch publicly stated that he would not provide forward guidance, adding shortly afterward: “I can update you on one piece of information: we will meet in four weeks.” Referring to the upcoming discussion, he also said, “I hope we’ll have a spirited ‘family argument’… Once we walk into that room and close the door, we’ll engage in a thorough debate—but beyond that, I cannot offer any further details.”
This communication approach will serve as the backdrop for his congressional testimony this week. By law, the Federal Reserve Chair must testify before Congress twice a year; Wosch will appear this week before the House Committee on Financial Services and the Senate Committee on Banking, Housing, and Urban Affairs at 10 p.m. Beijing time on Tuesday and Wednesday, respectively.
Lawmakers are expected to press him repeatedly on the economy, inflation, and the interest rate outlook, but based on Wosch’s recent public remarks, they are unlikely to receive clear answers. Even though he reaffirmed the Fed’s commitment to bringing down inflation during a panel discussion in Portugal, he still declined to provide specific commentary on the current state of the economy or the path for interest rates.
Last Friday, the Federal Reserve submitted its semiannual Monetary Policy Report to Congress in advance. The report stated that, given persistently elevated inflation, the Fed “will achieve price stability.” This message constituted the central policy signal conveyed to lawmakers ahead of Wosch’s first congressional testimony as Chair.
Since the beginning of this year, U.S. Treasury yields have continued to rise, and markets have already priced in expectations for higher rates. The report also noted that, as inflation has increased, the federal funds rate implied by a quantitative policy rule employed by the Fed exceeds the current target range of 3.5% to 3.75%.
However, the report specifically cautioned against mechanical interpretation of this rule. “Nevertheless, the prescriptions shown here ignore the fact that if the policy rate were to follow the path prescribed by the rule, the evolution of the economy would differ accordingly. Therefore, these prescriptions should be interpreted with caution,” the report stated.
On Tuesday, the U.S. will also release its latest inflation data, meaning Wosch could face questions about the Consumer Price Index (CPI) on the very day he testifies before the House. Markets expect the year-over-year CPI increase for June to come in at 3.8%, down from 4.2% in May, partly due to falling oil prices. The core CPI, which excludes food and energy, is projected to edge down slightly to 2.8% from 2.9%.
However, even if the data is released that day, given Wosch’s recent communication style, he is likely to avoid offering a definitive assessment of the figures.
Divergence on Interest Rates and the Debate Over the 'Reaction Function'
Minutes from the June policy meeting indicated that most Federal Reserve officials viewed two potential paths for interest rates this year, with the key determinant being whether inflation subsides. If inflation cools, rates could remain at their current level—or even be lowered in the future. However, if inflation proves persistent, further rate hikes may be necessary.
The minutes also outlined a more constrained scenario: if demand related to artificial intelligence remains robust, Middle East conflicts persist, or the effects of tariffs continue to transmit through the economy—while the labor market stays stable and inflation remains elevated—then nearly all officials agreed that policy would need to be 'tightened to some extent,' i.e., interest rates would need to rise.
However, for outside observers, the real uncertainty lies not only in whether rates might rise or fall, but more importantly in how Waller himself will respond to evolving economic conditions. What the market is watching is the Federal Reserve chair’s 'reaction function'—that is, how the central bank adjusts policy when the economy deviates from expectations—rather than a pre-committed path for interest rates.
Andrew Sacher of Bloomberg Economics drew a distinction on this point: 'Forward guidance tells the market what path the central bank believes it will follow. A reaction function, by contrast, tells the market how the central bank will respond to unexpected developments without providing a predetermined policy path.'
Richard Berner, a professor at New York University who served on the Fed’s research staff in the 1970s, said: 'Good communication conveys the Fed’s reaction function—the relationship between economic conditions and the path of the policy rate. That is what is truly essential.' He added, 'This is distinct from forward guidance.'
This debate has extended beyond markets into the Federal Reserve itself. Last week, Fed Governor Christopher Waller, speaking in Rome, explicitly distinguished between providing forward guidance and explaining how policy would respond under different economic scenarios. He stated that the latter approach reduces uncertainty for markets and households, adding, 'That makes life better for everyone.'
Waller has clearly placed emphasis on minimizing forward-looking signals. On July 1, while participating in a panel discussion with other central bank governors in Portugal, Waller defended his communication approach by citing bond market performance. He said, 'Volatility hasn’t increased—it has decreased.' He then added, 'So I hear these comments as if people don’t understand. I think they actually understand very well.'
Not all observers accept this assessment. Michael Feroli, Chief U.S. Economist at JPMorgan, argued that if Waller continues to remain silent, he risks ceding leadership in Fed communications to other policymakers. Feroli said, 'He has yet to demonstrate any command over the current state of the economy. We are left relying on other Fed officials to understand their interpretation of economic conditions.'
A Federal Reserve spokesperson declined to comment.
What other issues will Waller face?
Beyond inflation and interest rates, Waller may also be questioned about central bank independence during his confirmation hearing. Last week, when asked whether the Fed would take necessary measures to control inflation regardless of Trump’s preference for low rates, Waller responded: 'We have long been an independent central bank, and you will see no change in that respect.'
Artificial intelligence will also be one of the key issues that lawmakers focus on during questioning. Last week, when asked whether AI could exacerbate inflation, Waller did not offer a definitive judgment, only noting that AI’s impact is already visible on the demand side of the economy and adding that he ‘believes we will see its effects on the supply side at some point as well.’
Upon assuming the role of Fed Chair, he stated that artificial intelligence could boost productivity and suppress inflation, thereby creating conditions conducive to interest rate cuts. Waller has also appointed five special task forces to study the Fed’s public communications, balance sheet policy, the quality of existing data sources, how central banks perceive inflation, and how AI will affect productivity and employment. The semiannual Monetary Policy Report noted that developments in all these areas could influence how policy is implemented going forward.
Waller’s communication strategy has also been reflected in institutional arrangements. In June, when policymakers routinely submitted their quarterly economic and interest rate projections—used to compile the so-called ‘dot plot’—Waller did not participate. The post-meeting statement was significantly shortened, and the minutes released three weeks later were also notably condensed. Waller received support from some participants for trimming the post-meeting statement, with several officials welcoming a reevaluation of the Fed’s communication practices. Against a backdrop of heightened economic uncertainty, other officials have recently suggested that reducing forward guidance to investors may be necessary.
However, such support is not unconditional. If the new communication approach makes it harder for outsiders to understand how the Fed assesses the economy and adjusts policy accordingly, that support could wane. Waller stated in Rome that maintaining clarity about the Fed’s reaction function is ‘one of the most critical lessons learned over the past thirty years of central banking.’
This debate has reminded many veteran observers of an earlier era of the Federal Reserve. Lou Crandall, chief economist at Wrightson ICAP, recalled that when he began his career in the 1980s, the Fed did not even publicly announce its interest rate decisions—‘it was utter, absurd chaos.’
Alan Greenspan gradually expanded the Fed’s communication with markets, but even then, his language often remained ambiguous—so much so that investors would place bets based on the slightest cues, including the thickness of his briefcase when attending policy meetings. Crandall said, ‘There are many market participants who develop their own elaborate theories about what the Fed is thinking and build narratives around them. When the Fed doesn’t attempt to outline its views—not necessarily with absolute certainty, but with a degree of clarity—these theories run rampant.’
Former Fed Vice Chair Don Kohn believes it is understandable for the new chair to take time to clarify his own thinking, but this phase cannot last indefinitely. He said:
‘At some point, he will have to provide a more detailed view of the economy, telling us what he thinks and how that aligns with the Committee’s perspective. I suspect this situation won’t go on forever.’
Editor/Jeffy