In his prepared remarks, Fed’s Waller said:
- Forward guidance remains a valuable monetary policy tool when used under the right circumstances.
- Forward guidance can strengthen monetary policy transmission by influencing financial conditions before actual policy rate changes occur.
- When it works, forward guidance can change economic conditions more quickly than adjusting the policy rate alone.
- Forward guidance should remain part of the Fed’s policy toolkit and continue to be used when appropriate.
- The Fed’s late-2021 experience showed the drawbacks of inflexible guidance.
- Guidance helped push market interest rates higher ahead of actual Fed rate hikes.
- However, it also constrained policymakers by effectively committing them to waiting until March 2022 before raising rates.
- There are times when forward guidance hinders rather than helps monetary policy.
- Forward guidance is less useful when multiple economic outcomes are equally likely, as it can reduce the Fed’s flexibility to respond to changing conditions.
- The Fed continues to face a difficult trade-off between inflation risks and risks to employment.
- Policy guidance must remain flexible. If it is too rigid, it can impede effective policy transmission.
- In some situations, it is better for the Fed not to use forward guidance at all rather than risk limiting its ability to respond to evolving economic conditions.
Waller does not talk specifically about policy. However, his comments are at odds with Fed chair Warsh who is leaning away from forward guidance preferring to make decisions on the data and keep those decisions open without committing to a bias.
This article was written by Greg Michalowski at investinglive.com.
