Fed Governor Christopher Waller stated that the measured use of "forward guidance" continues to be a significant tool for monetary policy, aiding in shaping market expectations. However, policymakers should maintain flexibility in its application and avoid limiting their room for policy adjustment through excessive commitments. Waller made these remarks on Monday during a conference hosted by the Bank of Italy in Rome.
Recently, the new Federal Reserve Chair, Kevin Warsh, has repeatedly expressed a desire to reduce the Fed's reliance on forward guidance, preferring instead to adjust monetary policy dynamically based on the latest economic data. Waller noted that forward guidance played a positive role during the period of high inflation following the COVID-19 pandemic. By signaling future rate hikes to the market in advance, the Fed helped tighten financial conditions even before official rate increases, thereby enhancing the transmission effect of monetary policy.
However, he also acknowledged that the Fed has sometimes been overly rigid with forward guidance in the past, which in turn constrained policy flexibility. He cited an example from 2020 to 2021, when the Fed explicitly indicated it would keep interest rates low for an extended period. Subsequently, inflation surged rapidly, creating greater pressure for policy adjustments.
"I have always believed forward guidance is a valuable policy tool; it has strengthened the effectiveness of monetary policy on numerous occasions and will continue to do so in the future," Waller said. "But forward guidance is more an art than an exact science. At times, instead of aiding policy formulation, it can become a constraint."
Regarding Warsh's recent reiteration that the Fed remains firmly committed to achieving its 2% inflation target, Waller stated that he has consistently been a strong supporter of this goal. The real question, he suggested, is "how quickly this target needs to be achieved." He believes Warsh's statement is more accurately a reaffirmation of the Fed's commitment to the 2% inflation target.
Waller also mentioned that last year he supported interest rate cuts to stabilize the labor market. However, he noted that signs of stabilization are now emerging in the job market, and the Fed's policy focus is shifting back towards controlling inflation. "The risks have completely changed," Waller remarked. "This also means we need to reconsider how monetary policy should respond."
On whether the Fed should reduce its public communication in the future, Waller believes it depends on whether the market sufficiently understands the central bank's policy reaction mechanism. If the market can clearly comprehend the Fed's policy objectives and its likely responses to different sets of economic data, policy communication could be appropriately reduced. Conversely, public remarks would still be necessary to strengthen market guidance.
Last month, the Fed kept interest rates unchanged consecutively. However, the latest published interest rate projections showed that among the 18 policymakers, nine anticipate at least one more rate hike this year. Unlike most officials, Warsh did not submit a personal interest rate forecast, citing his desire to diminish the Fed's reliance on forward guidance.
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