Federal Reserve Governor Christopher Waller said forward guidance can be an effective instrument for monetary policymakers when employed under suitable circumstances, but that it risks doing more harm than good if applied inflexibly.
Speaking from prepared remarks for delivery at a Bank of Italy conference in Rome on the subject of monetary policy transmission, Waller reiterated his view that forward guidance has at times materially strengthened policymaking and remains a useful element of the central bank toolkit.
Waller acknowledged the common estimate that changes in the policy interest rate often take one to two years to fully work through the economy. Still, he pointed to the fall of 2021 as an instance where talking clearly about expected future rate increases coincided with a steady rise in market interest rates once investors were steered toward the prospect of higher policy rates.
"When it works, forward guidance can change economic conditions more quickly than adjusting the policy rate alone," Waller said.
The governor’s remarks highlight an internal debate at the Fed about how much the central bank should use forward guidance and how it should present that guidance. Waller’s emphasis on the effectiveness of the tool contrasts with the tone from Fed Chair Kevin Warsh, who has warned that signaling future policy too explicitly can reduce the Fed’s flexibility to respond to new data and has discouraged its use, at least in the current environment.
Illustrating that caution, the statement released after Warsh’s first meeting as chair removed language that had suggested what sorts of rate moves the Fed might take.
Waller also conceded that forward guidance can be counterproductive in certain moments. He said there have been occasions when providing an outlook for future policy "has hindered, rather than helped." He pointed to the fall of 2021 as a dual example: the Fed’s communications signaled rate increases, but the bank felt constrained by that guidance and did not implement an actual rate hike until March 2022.
Waller further warned that forward guidance is especially troublesome when several different economic outcomes appear equally plausible. In such settings, he suggested, the tool can impair policy transmission if it is not sufficiently adaptable to shifting circumstances.
Fed officials are currently divided over whether inflation remains the dominant risk or if threats to employment should take precedence. Waller did not take a position on the present policy stance in his remarks, but he underlined the general point that "If it is not flexible enough, it can hinder policy transmission. And, in some cases, it’s best not to use it at all."
Markets don't take breaks—but you can. While you're enjoying summer, the market keeps moving. The good news? ProPicks AI never stops working—analyzing thousands of stocks using 100+ financial metrics to surface winning opportunities for you.
Our Tech Titans strategy has more than doubled the S&P 500 since launching in Nov 2023, catching winners like Siemens Energy (+231.5%) and Sandisk (+189%) before the crowd.
Invest smarter this summer—without sacrificing your downtime.
July Sale - 60% Off InvestingPro