The International Monetary Fund’s chief economist said that Federal Reserve Chair Kevin Warsh’s plan to reduce forward rate guidance on monetary policy was “entirely appropriate,” though central banks would always need to provide some long-term direction for markets.
Pierre-Olivier Gourinchas, who leaves his post next week to return to academic life, said strong forward guidance had received criticism because it committed central banks to future action regardless of economic developments.
“That is something that is not tenable, of course,” Gourinchas said in an interview, adding that such rigid guidance proved costly when U.S. inflation surged in 2021 and 2022 but the Fed did not act quickly because it had earlier promised to keep rates steady.
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“So I think moving away from these strong forms of forward guidance is entirely appropriate. Saying there is no forward guidance, I don’t think that is actually the case ever. You do it explicitly, or implicitly, the market is going to form a view,” he said.
Warsh, who became Fed chief last month, has launched a review that could reshape how the central bank makes decisions and communicates with the public. In his first policy meeting as chair, he organized a unanimous consensus around a stripped-down policy statement that removed any forward guidance on what actions the central bank might take in the near term.
Gourinchas’ remarks were the first by a senior IMF official on the Fed’s new approach. The IMF had previously urged central banks to be transparent about their monetary policy plans to ensure inflation expectations remained anchored.
Gourinchas said the IMF had seen other central banks moving in the same direction, though many were still under inflation targeting regimes aimed at managing inflation one or two years into the future.
“You need to provide some amount of guidance, so that the market will form some views about what the long-term rates are going to be, and that actually is what’s going to have an influence on the conditions,” he said.
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