Federal Reserve Gov. Christopher Waller on Monday defended the central bank's practice of providing forward guidance -- a stance somewhat at odds with remarks from new Chairman Kevin Warsh.
"I continue to believe that forward guidance can be a valuable tool that has, at times, significantly strengthened policymaking and will continue to be useful," Waller said in Rome at an central banking forum sponsored by the Bank of Italy.
Warsh has expressed his dislike of the Fed's use of forward guidance and dropped it from the Federal Open Market Committee's June policy statement and his subsequent public remarks.
"My view is that financial markets and the real economy work best when you look at what's happening in the real economy, you make your own judgments," Warsh said last week at the European Central Bank's conference in Portugal.
The chairman said there has been a tendency, particularly in times of crisis, when Fed officials felt they needed to "spoon feed" markets signals on how the economy was going to get out of that.
"That was the right policy for a crisis. It is not the right policy for the time that we have now. And so sometimes unlearning is harder than learning, and I'm going to keep at it," Warsh said.
But Waller indicated he wasn't ready to throw out the practice completely, noting that while it isn't appropriate in all circumstances, it has been useful in the past.
Forward guidance is the practice of providing markets and the wider public with signals on where monetary policy is headed, something former Chair Jerome Powell did.
In September 2021, for example, Waller point out that the FOMC signaled that officials planned to tighten policy in coming months. But the Fed didn't raise interest rates until March 2022.
Even so, from September 2021 through mid-February, Waller said the two-year Treasury yield rose nearly 200 basis points.
"That rise effectively shaved off about six months from the usual 12- to 24-month lag that one might conjecture would be needed to see the 200 basis points of actual tightening affect the economy," Waller noted.
To be sure, Waller acknowledged there have been times when forward guidance has hindered, rather than helped, policymaking. Waller pointed to inflation surge in 2021 and 2022, noting the central bank's guidance signaled that rate increases were on hold in 2020 and 2021, even though price growth was on the rise.
"In the end, this restrictive guidance tied the hands of the FOMC in 2021 and unnecessarily delayed rate increases," Waller said.
Forward guidance is also less helpful when economic conditions -- and the potential policy solutions -- are equally uncertain.
"One cannot simply take a weighted average of these scenarios as the 'base case' and use it to give forward guidance," Waller said.
Waller likened this to driving up to an intersection and the traffic light is turning yellow. A driver can stop before the intersection and sit through the light, or he can drive through the intersection on the yellow light. But the "base case," as it were is not going to include stopping in the middle of the intersection.
"The takeaway is that forward guidance can help speed up policy transmission, but if it is not flexible enough, it can hinder policy transmission. And, in some cases, it's best not to use it at all," Waller said.
There is, however, a difference between forward guidance and a reaction function, Waller said.
A reaction function gives context to how policymakers will respond to economic shocks, for example.
"A reaction function is saying: Give me the data, plug it in, and I'll tell you what I'll do," he said.
Forward guidance, on the other hand, tells the public and markets what policy is going to be -- or will probably be -- before really getting any data.
"Those are two very different exercises," Waller said.
As long as a central bank's reaction function is well-defined and well understood, Waller said policymakers don't necessarily have to talk that much.
There may be times, though, when central bankers will want to provide forward guidance, such as during financial or economic turbulence, Waller noted.
And it's important for central banks to communicate their reaction function, Waller said. "Be clear about what you're objectives are."
That includes explaining to the markets and wider public how policymakers are going respond to the data.
"If you're clear enough upfront without that, you reduce uncertainty in the markets and for households," he said, "and it makes everybody's lives better."
"If your reaction function is not well defined, and markets don't understand it, then you do need to speak."
Write to Megan Leonhardt at megan.leonhardt@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
July 06, 2026 13:02 ET (17:02 GMT)
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