U.S. Federal Reserve Governor Christopher Waller has argued that forward guidance on interest rates can be "valuable" at certain times, although he stressed that it must be applied "flexibly." His comments come amid an internal debate over these indications from Fed members regarding the future trajectory of rates, a mechanism that the new chairman of the central bank, Kevin Warsh, has openly questioned and intends to suppress.
"Forward guidance can help speed up policy transmission, but if it's not flexible enough, it can hinder it. And, in some cases, it's better not to use it at all," the Fed governor highlighted.
Along these lines, Waller reiterated that on numerous occasions forward guidance has helped to "significantly" strengthen the design of monetary policy and insisted on its role as a "valuable tool" for central banks.
On the other hand, he warned that this instrument can hinder the transmission of monetary policy if it is formulated in a "too strict or rigid" manner or when Fed officials must deal with different economic scenarios that demand differentiated responses and strategies.
"Let me illustrate. I'm driving and I come to an intersection. The light turns yellow. I can stop before the intersection and wait for it to change. Or I can go through the intersection and keep going. But my base case is not to stop in the middle of the intersection. In these divergent situations, it is much more difficult to offer forward guidance, and therefore, it is less useful," Waller explained.
Kevin Warsh has shown his opposition to what is also known as the 'dot plot,' the opinions of Federal Reserve members on the future path of rates that allows markets to anticipate the Fed's position on monetary policy, and the newly appointed 'guardian of the dollar' did not participate in these estimates at the last meeting of the issuing institute --his first as chairman--.
Likewise, Warsh stated last week at the ECB forum in the Portuguese town of Sintra that the Fed will continue to publish forward guidance, although only for a "brief period."