【U.S. Interest Rates】Fed Governor Waller Supports "Forward Guidance," Believing It Can Play a Positive Role When Used Appropriately

Newly appointed Fed Chair Kevin Warsh said he would reduce the Fed’s reliance on so-called “forward guidance.” Fed Governor Christopher Waller said that if used appropriately, policymakers’ approach to signaling the future path of interest rates can still play a positive role.

Waller said forward guidance is still a valuable policy tool. During the pandemic-era surge in inflation, forward guidance helped the central bank convey signals that interest rates would be raised. Even before official rate hikes, financial conditions tightened in advance.

However, Waller also said Fed officials sometimes use forward guidance too rigidly, which in turn constrains their own policy space. He cited an example: in 2020 and 2021, the Fed had clearly stated that it would keep interest rates unchanged for a period of time, but at that time inflation had already begun to rise rapidly.

Waller said:

“I still believe forward guidance is a valuable tool, and at certain times it significantly enhances the effectiveness of monetary policy and will continue to play a role in the future. But forward guidance is more like an art than a science. Sometimes it does not help policymaking at all—instead, it becomes an obstacle.”

When asked how he views Warsh’s pledge to bring inflation down to the 2% target, he said he has never wavered from the 2% inflation target. The only question is how quickly it can be achieved.

Waller previously supported the Fed cutting rates in 2025 to boost employment. He said the labor market has shown signs of stabilizing, allowing central bank officials to refocus on inflation.

When asked how much the Fed officials might reduce communication with the outside world about monetary policy, Waller said it depends on whether the public and financial markets understand how the central bank will adjust policy based on changes in the economic situation.

“If your reaction function is not defined clearly enough, and the market also cannot understand it, then you need to communicate. What matters is explaining your reaction function to the market, clarifying your policy objectives, and how you will respond to economic data.”