The 20 year-old spent part of last season on-loan at Vicarage Road.
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USA international Wiley joined Chelsea last year from Atlanta United.
Watford's sporting director Gianluca Nani said, external: "He was impressive in the games he played for us last season and his attitude is incredible.
"To have him for a full season means we have the talent and consistency Paulo (Pezzolano) wants defensively."
Wiley also said: "Caleb is a really exciting player. He combines tactical knowledge with real attacking thrust and bags of offensive potential."