Fed’s Waller: Forward guidance can be “valuable tool” but may become a hindrance

Federal Reserve (Fed) Governor Christopher Waller said on Monday that forward guidance can strengthen the impact of monetary policy when used properly, but warned that it can also become problematic if it limits policymakers’ flexibility. Speaking in prepared remarks for a Bank of Italy conference in Rome, Waller said forward guidance “can be a valuable tool” and has at times helped improve policymaking.

Key takeaways:

Forward guidance can be a valuable tool for monetary policy and may continue to be useful.

When effective, forward guidance can speed up the impact of monetary policy, as seen in late 2021.

Guidance can become a problem if it is too strong, too rigid, or limits flexibility under uncertain economic conditions.

Fed policymakers remain committed to the 2% inflation target.

Waller said inflation risks have increased while the labor market appears stabilized.

Fed must clearly explain its reaction function if markets do not understand it.

The Fed will not keep rates low to help finance US government deficits.

Waller would prefer an inflation target range, but said changing the target now would not be credible.

Waller did not provide comments on the current economy or the Fed’s policy outlook.”