Rethinking Fed's Forward Guidance: The Power of Words in Monetary Policy

San Francisco Federal Reserve Bank President Mary Daly suggests the U.S. central bank should limit forward guidance on monetary policy, noting the irreversible power of words. Past definitive guidance during uncertain times has been criticized for delaying rate hikes. The Fed is reconsidering its communication strategies.

Mary Daly, President of the San Francisco Federal Reserve Bank, has proposed that the U.S. central bank reduce its reliance on forward guidance concerning monetary policy. During her address at the Western Economic Association International annual conference, Daly emphasized the potent impact of words, asserting that they can be harder to retract compared to adjusting interest rates.

In 2021, the Federal Reserve committed to expanding its balance sheet and refrained from raising rates until inflation exceeded a 2% target. This guidance, later seen as delaying response to rising inflation, prompted analysts and policymakers to criticize the decision's impact on rate hikes.

With the Fed currently revisiting its policy framework, Daly clarified her remarks were not part of this review. The central bank aims to revamp communication strategies, including potential updates to the influential 'dot plot,' which outlines expected rate trajectories.

(With inputs from agencies.)