International Monetary Fund chief economist Pierre-Olivier Gourinchas on Friday endorsed Federal Reserve Chair Kevin Warsh's move to reduce strong forward guidance on interest rates, calling the change "entirely appropriate." Gourinchas, who is scheduled to leave his IMF post next week to return to academic life, framed the shift as a response to the limits and risks of firm commitments on future policy.
In an interview, Gourinchas explained that very strong forward guidance - the practice of promising a particular future policy path regardless of how economic conditions evolve - has drawn criticism because it effectively ties a central bank's hands. "That is something that is not tenable, of course," he said, noting that such rigid guidance became costly when U.S. inflation rose sharply in 2021 and 2022 and the Federal Reserve did not move quickly in part because it had earlier signaled it would keep rates steady.
Gourinchas welcomed the Fed's recalibration. "So I think moving away from these strong forms of forward guidance is entirely appropriate," he said. At the same time, he rejected the notion that central banks can avoid all guidance. "Saying there is no forward guidance, I don't think that is actually the case ever. You do it explicitly, or implicitly, the market is going to form a view," he added.
Warsh, who took the Fed chair role last month, has initiated a review of the central bank's decision-making and communication practices that could alter how the institution outlines its policy path. In his first policy meeting as chair, he brought colleagues to a unanimous agreement on a streamlined policy statement that omitted forward guidance about the Fed's near-term actions.
Gourinchas' comments represent the first public remarks by a senior IMF official on the Fed's revised communications approach. The IMF had previously urged central banks to be transparent about their policy plans to help anchor inflation expectations.
He observed that other central banks appear to be moving in a similar direction, even as many operate under inflation-targeting frameworks that aim to influence inflation one to two years ahead. "You need to provide some amount of guidance, so that the market will form some views about what the long-term rates are going to be, and that actually is what's going to have an influence on the conditions," he said.
The remarks underscore a tension in modern central banking: striking the balance between avoiding commitments that could be costly if conditions change and offering enough information that markets can form expectations about longer-term interest rate paths.
Summary
IMF chief economist Pierre-Olivier Gourinchas endorsed Fed Chair Kevin Warsh's decision to pare back explicit forward guidance, arguing that overly firm commitments proved untenable during the 2021-22 U.S. inflation surge. Gourinchas, who will depart the IMF next week to return to academic life, emphasized that some guidance remains necessary because markets will form expectations whether guidance is stated explicitly or left implicit.