Fed’s Waller says forward guidance valuable but must be flexible

Investing.com -- Federal Reserve Governor Christopher Waller said Monday that forward guidance can speed the impact of monetary policy when used properly, but becomes problematic when applied inflexibly.

"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 in remarks prepared for delivery to a Bank of Italy conference in Rome on monetary policy transmission.

Waller noted that when the Fed began steering investors toward coming rate hikes in fall 2021, market interest rates started to rise steadily, even though interest rate changes typically take one to two years to affect the economy.

"When it works, forward guidance can change economic conditions more quickly than adjusting the policy rate alone," Waller said.

His comments differ from the approach taken by Fed Chair Kevin Warsh, who has stressed that forward guidance can reduce the central bank's ability to respond quickly to new economic developments. The statement issued after Warsh's first meeting as chair removed references to potential future rate adjustments.

Waller acknowledged that providing guidance about future policy "has hindered, rather than helped" in some situations. He pointed to fall 2021 as an example, when the Fed discussed raising rates but felt constrained by prior guidance and did not approve a rate hike until March 2022.

Waller also said forward guidance can create difficulties when multiple economic outcomes appear equally probable. Fed officials currently face uncertainty over whether inflation or employment risks pose the greater concern.

"If it is not flexible enough, it can hinder policy transmission. And, in some cases, it's best not to use it at all," Waller said.

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