The US central bank should consider giving less forward guidance about its monetary policy intentions, particularly in uncertain times, San Francisco Federal Reserve Bank President Mary Daly said on Sunday.
“Words have power, which is a great tool. But words can be harder to reverse than the interest rate,” Daly said in remarks prepared for delivery to the Western Economic Association International annual conference that did not include any comments on the economic or monetary policy outlook. “They set expectations, which can be hard to change in the event the economy evolves differently than we expect.”
In 2021, the Fed said it would keep expanding its balance sheet and would not raise rates until inflation was on track to exceed its 2% goal for some time, an approach it felt was warranted given that inflation had under-run the 2% goal for years. Analysts and many Fed policymakers now say they believe the Fed was late to start raising rates to fight rising inflation in part because of this definitive guidance.
“The lesson for me from that period is that being definitive in highly uncertain times comes with a price,” Daly said. The central bank should, she said, be flexible and dynamic in how it communicates to the public.
The Fed is currently reevaluating its policy framework, and Daly said her remarks were not specifically about that effort. The Fed is also expected to redo its approach to communications, including potential changes to its so-called “dot plot” setting out Fed policymakers’ expected rate paths and used by markets as a guide to where the Fed expects rates to go.
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