Federal Reserve Speeches·Jul 6, 2026, 11:00 AM ET

Waller, Two Thoughts on the Transmission of Monetary Policy

Initial economic conditions are crucial for determining appropriate monetary policy actions, as historical averages are poor predictors during unique situations like the post-pandemic inflation surge.
In 2022, a record-high ratio of job vacancies to unemployed workers caused employers to cut vacancies instead of layoffs, resulting in only a modest rise in unemployment despite rapid policy tightening.
Large economic shocks trigger nonlinear behavioral changes that alter monetary policy transmission, often shortening typical policy lags contrary to linear historical models.
Forward guidance can accelerate policy transmission by influencing market expectations, as seen when rate expectations rose significantly before actual rate hikes in late 2021.
Rigid forward guidance can hinder policymaking by tying the hands of central bankers, evidenced by the FOMC's September 2020 statement which delayed necessary rate increases in 2021.
Forward guidance is less effective when policymakers face divergent economic scenarios with significant probabilities, as averaging these paths into a single base case is often impractical.
The optimal use of forward guidance requires flexibility, as it can speed up transmission when adaptable but impair it when too rigid or when multiple distinct outcomes are possible.