Fed Governor Waller Defends Forward Guidance, Says It Can Be Positive When Used Properly

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According to Jinse Finance, on July 7, Federal Reserve Governor Christopher Waller stated that if used properly, policymakers' practice of signaling the future path of interest rates can still play a positive role. Waller made these remarks at a conference in Rome. Previously, newly appointed Fed Chair Kevin Warsh promised to reduce the Fed's reliance on so-called "forward guidance" and adopt a more data-dependent approach to policy adjustments. Waller said forward guidance remains a valuable policy tool. During the pandemic period when inflation surged, forward guidance helped the central bank signal to the public that interest rates would rise. Even before the Fed formally raised rates, financial conditions tightened as a result. However, he also noted that Fed officials sometimes applied forward guidance too rigidly, tying their own policy hands. He cited the example of 2020 and 2021, when the Fed explicitly stated it would keep rates unchanged for a period, even though inflation had already begun to rise rapidly.
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