Waller Says Fed's Forward Guidance Should Be Flexible, Supporting Warsh

"There were times it hindered policy decisions"
Missteps in signaling zero rates during the COVID-19 crisis
Fed failed to address inflation properly in 2022

Christopher Waller, a member of the U.S. Federal Reserve Board, stated that central banks' "forward guidance" should be operated with greater flexibility. This stance appears to support Federal Reserve Chair Kevin Warsh's efforts to review the Fed's communication strategies.

According to Bloomberg and the Financial Times (FT) on July 6 (local time), Waller gave a speech at a conference hosted by the Bank of Italy in Rome, Italy, where he said, "Forward guidance is closer to art than science," and "There have been times when it hindered rather than aided policy decisions." He added, however, "Forward guidance has sometimes significantly strengthened policy decisions and will continue to be a useful tool moving forward."

Waller, U.S. Federal Reserve Board Governor, Holds Policy Dialogue with Governor of the Bank of Korea. Yonhap News.

Forward guidance is a communication tool used by central banks to pre-announce policy directions, such as the future path of interest rates, in order to manage market expectations and financial conditions. While it can help stabilize long-term interest rates and financial markets, critics have argued that it may limit policymakers' options when economic conditions change rapidly.

Waller cited as evidence of such criticism the Fed's signal in 2020–2021 that it would keep its policy rate at near zero for an extended period. At the time, inflation rates were quickly exceeding the Fed’s 2 percent target and unemployment was falling rapidly, but the previous commitment to maintain low rates tied policymakers' hands and delayed rate hikes.

In 2022, U.S. inflation soared above 7 percent—more than three times the Fed’s target. The most severe inflationary pressure since the 1980s was triggered independently by supply chain disruptions and by the combination of expansionary fiscal and monetary policies.

Nevertheless, Waller did not deny the necessity of forward guidance itself. He assessed that during the pandemic-driven surge in inflation, the Fed’s signaling of possible future rate hikes helped to tighten financial conditions even before actual rate increases occurred. The key issue, he explained, is how prudently and flexibly forward guidance is employed.

Regarding whether the Fed could reduce its communications, Waller explained that it depends on how well the market understands the central bank’s response function. He said, "If the response function is not clearly defined and the market does not understand it, then we need to communicate," and emphasized, "It is important to clearly communicate what our goals are and how we will respond to economic indicators."

He also commented on Chair Warsh’s renewed commitment to the Fed’s 2 percent inflation target, saying, "I have never failed to be committed to the 2 percent goal," and added, "The issue is how quickly we get there." Waller noted that Warsh’s remarks should be seen as a reaffirmation of the Fed’s existing mandate, not a new promise.

Last year, Waller supported rate cuts to bolster employment, but he now assesses that recent signs of labor market stabilization have provided policymakers with more room to focus on inflation. "The direction of risk has completely reversed," he said, "and this can also change the way we approach policy."

Although the Fed held its policy rate steady last month, the inflation rate has risen to its highest level since 2023, increasing the momentum for a rate hike this year. Half of the Fed’s 18 policymakers projected at least one rate increase in 2026.

Waller’s remarks come as Chair Warsh is pushing to revamp the Fed’s external communication strategy. Warsh has criticized forward guidance for exacerbating the Fed’s policy missteps. Last month, he established a task force to reassess the Fed’s policy decision-making and its communication with markets and the public. The results of this review are scheduled to be released by the end of 2026.

Since Warsh took office, changes have already emerged in the Fed’s communication approach. At his first Federal Open Market Committee (FOMC) meeting, Warsh did not submit his own rate projection for the dot plot, which represents policymakers’ rate outlooks. He reportedly refrained from submitting a projection due to his negative stance on forward guidance.

This content was produced with the assistance of AI translation services.