Federal Reserve Governor Waller: Forward Guidance is Not the More, the Better; It Can Be Dispensed with Entirely When Necessary

BlockBeats News, July 6. Federal Reserve Governor Waller stated that monetary policy decisions should not mechanically apply historical experience, but should be based on the current economic "initial conditions" to judge policy effectiveness. Regarding forward guidance, Waller stated that it is still a valuable tool that can influence the market in advance and expedite policy transmission. For example, after the September 2021 FOMC signaled future policy tightening, even though the actual rate hike did not occur until March 2022, the two-year Treasury yield had already risen by nearly 200 basis points, showing that the market had preemptively completed some policy transmission.

However, Waller also pointed out that when forward guidance is too strong or rigid, it may actually weaken policy flexibility and delay policy adjustments. He mentioned that the exit effective lower bound condition set by the FOMC in September 2020 was not adjusted even after inflation surged well above 2% and the unemployment rate rapidly declined in 2021, unnecessarily postponing the timing of rate hikes. Waller stated that forward guidance can help expedite monetary policy transmission, but if it lacks flexibility, it may also hinder policy transmission; in some cases, the best choice is not to use forward guidance at all.