Federal Reserve Governor Waller: Transparent communication is better than “never explain”; the Fed needs to clearly define its reaction function

Mars Finance News reported that on September 3, Federal Reserve Governor Waller said the Fed must establish clear and consistent policy response rules; otherwise, markets would be unable to make forecasts. He said that although the specific quantification of the reaction function may be flawed, it is very important from a qualitative perspective. He has a fundamentally different view from Fed Chair Warsh on the perfection of the reaction function.

Regarding the Fed’s transparency, Waller said there is no benefit to surprising the market. He criticized “never explain” as an old model and not a good one, saying it would be better to appropriately disclose some indication of the future direction of policy.

Waller also said there are very strong differences of opinion within the Fed regarding communications, and opposition to scenario analysis was also very strong last year. It remains uncertain what the communications working group will achieve. Regarding discussions by the balance sheet working group, he said it would oppose any proposal that would cause reserves to return to a scarce state. Regarding the data working group, he emphasized the need to be alert to trust issues and to use data that people can verify. He added that the inflation working group could be the most helpful to the Federal Open Market Committee (FOMC).