- Key insight: Federal Reserve Chair Kevin Warsh's call for less monetary policy communication continues to gain traction among policymakers.
- Expert quote: "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. But forward guidance is more art than science, and there have been times when it has hindered, rather than helped, policymaking." — Federal Reserve Gov. Christopher Waller
- Forward Look: The Fed is expected to announce the members of its communications policy task force at some point this month. The group is one of five convened by Warsh to suggest policy reforms by the end of the year.
Federal Reserve Gov. Christopher Waller is OK with the central bank's pivot toward less communication, but he isn't willing to give up on the practice of forward guidance altogether.
In a speech delivered Monday at a conference hosted by the Bank of Italy, Waller said future-looking communications can improve the transmission of monetary policy changes, but only when used properly.
"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. "But forward guidance is more art than science, and there have been times when it has hindered, rather than helped, policymaking."
Waller's comments come as the Fed is reconsidering its communications strategy writ large, a process that will begin in earnest as soon as this week with the formation of a
In prepared remarks delivered Monday, Waller said he has seen examples of this play out during his time on the Federal Open Market Committee, the Fed's monetary policymaking body. He pointed to September 2020, when the group's policy statement advised that it would hold the federal funds rate to its lower bound until the economy achieved maximum employment and inflation returned to 2% and was "on track to moderately exceed 2% for some time."
"This guidance didn't change over the course of 2021 as inflation was rising quickly above 2% and unemployment was rapidly falling, leaving the public to wonder what 'for some time' meant," Waller said. "In the end, this restrictive guidance tied the hands of the FOMC in 2021 and unnecessarily delayed rate increases."
He added that when the path of policy is unclear, the Fed's communications create a "base case" that is the average of all the potential outcomes. In these cases, the guidance can suggest an outcome that is not likely to occur.
At the same time, Waller said he has lived through episodes in which the Fed's guidance clearly sped up the process of monetary policy transmission. He highlighted the guidance the FOMC gave in September 2021 that it would soon raise interest rates to deal with rising inflation. During the following six months, markets caused 2-year Treasury bill yields to rise by 2 percentage points, before the Fed even changed its policy.
"That rise effectively shaved off about 6 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," he said.
Waller said forward guidance should remain in the Fed's monetary policy tool belt, but it should probably be used more sparingly than it has been in recent years.
"So the takeaway is that forward guidance can help speed up policy transmission, but if it is not flexible enough, it can hinder policy transmission," he concluded. "And, in some cases, it's best not to use it at all."
