Bloomberg News
As the Federal Reserve examines its approach to communications, one official said the central bank should consider changes to its quarterly forecasts.
During an on-stage appearance at an event hosted by the Bank of Korea, Fed Gov. Christopher Waller said he would like to see reforms to the summary of economic projections, or SEP, which are produced by the Federal Open Market Committee four times a year. The next SEP is expected to be released when the FOMC meets again later this month.
Waller said the Fed could not stop the practice, which began in 2007, noting that it would imply the FOMC was “hiding something” from the public. But, he said, certain modifications could create more clarity, such as removing from the report year-specific forecasts, which can be interpreted by market participants in different ways.
“A simple thing is, we do this calendar year forecast — ’25, ’26, ’27 — it should be just a rolling six-month, 12-month, 18-month and not pin it down to some calendar date,” he said. “Just keep updating as you go forward.”
Waller also highlighted scenario analysis, a suggestion made by former Fed Chair Ben Bernanke during the central bank’s monetary policy conference last month, as another viable option for incorporating a wider range of guidance into forecasts.
“You could easily ask people: ‘Here’s a scenario, what does your SEP look like? Here’s a different scenario, what does your SEP look like?'” Waller said. “It just gives you two different SEP paths to communicate some uncertainty and differences, how conditions would change and how [you would] change policy. I don’t think that’s hard … and it could provide some additional information, if you wanted to do it.”
The comments came during a discussion at the Bank of Korea’s International Conference. The moderator for the discussion, Chang Yong Rhee, the Korean central bank’s governor and top monetary official, asked Waller whether changes to the SEP — also known as the “dot plot” because of how data points are displayed in the report — might be incorporated into the Fed’s ongoing monetary policy framework review.
Waller said he would like to see changes to the SEP made independent from the five-year policy review.
“I don’t like tying the SEP up with the framework myself, I’d prefer to do it in a separate thing,” he said. “But, I mean, there’s a lot of things that could be done with the SEP that would lead to better communication.”
Waller also noted that the Fed is considering various other tweaks to its policy framework, including abandoning the so-called flexible average inflation targeting approach — which would have allowed for inflation to run above the Fed’s 2% target for a period of time after a sustained period of sub-2% growth — in favor of the more traditional flexible inflation target, which keeps the target more firmly at 2%.
Tariff outlook
During prepared remarks, Waller gave an update on his views about tariffs and their impact on the broader economy.
Harkening back to an April speech in which he outlined a large-tariff scenario of 25% and a smaller-tariff scenario of 10%, Waller said recent developments indicate that the final position of new trade policy will likely settle somewhere in between the two.
In light of this, Waller said he continues to expect tariff-induced inflation to be “transitory,” with prices increasing in response to tariffs and then stabilizing. While he acknowledged that the Fed made a similar call about post-pandemic inflation that proved to be incorrect, Waller said the current situation is missing the three main components that drove inflation to its highest level in nearly 40 years: a labor shortage, persistent supply chain disruption and flood of fiscal stimulus.
“There is no longer a shortage of labor and, at least so far, no indication that tariffs are causing big disruptions in supply chains, as the recent surge in imports … should attest. While Congress is putting together a tax bill, as it stands now, a large share of that legislation extends tax cuts that have been on the books for eight years and thus would not be stimulative,” he said. “Finally, monetary policy is in a very different position … so I do not believe one can use 2021 and 2022 as a basis for predicting what will happen to the persistence of inflation arising from tariffs.”
Still, Waller said his new baseline assumption — a trade-weighted tariff of around 15% — would lead to an overall price increase of around 1% and an increase in unemployment. But he did not believe those developments would be enough to warrant a tightening of monetary policy, pointing to recent inflation readings which show price growth cooling.
“Now, if inflation turns out to be a lot more persistent, then of course that makes the tradeoff a lot harder, which is what I think you hear from a lot of my other colleagues. They think it’s going to be more persistent and so we’re facing a very difficult trade-off,” he said. “But for me as long as I think this happens the way I’ve thought it would, I don’t think the trade-off is that hard.”
Stablecoins a ‘nice way’ to add competition
Waller, who heads the Federal Reserve Board of Governors’ payments committee, said stablecoin legislation in the U.S. will bring welcome developments to the payments space, albeit one that banks find disagreeable.
During the question-and-answer session, Waller said allowing the proliferation of stablecoins would help bring down high transaction costs without the government stepping in to regulate the market more heavily or cap fees.
“I just view it as a nice way to introduce more competition and drive down costs from the private sector instead of the government or regulator stepping in and making these decisions,” he said.
Waller acknowledged that banks are not happy with this new source of competition, especially considering new entrants will be subject to less stringent oversight. But, he said, this different regulatory treatment is appropriate, given that pure-play stablecoin issuers will not be extending credit or engaging in other banking activities.
“As far as I’m concerned, make sure the playing field is level so the banks can issue it if they want. There’s going to be more regulation on a bank simply because they do credit extension and everything else,” he said. “If you had a very narrow payment provider — all they do is payments, collect fees; they don’t extend credit, they don’t do anything — why would you not want to have a narrower, less intrusive set of regulations?”
