The US central bank should consider giving less clear guidance about its monetary policy, especially during uncertain times, said Mary Daly, president of the San Francisco Federal Reserve, on Sunday.
“Words have power, which is a useful tool. But words can be harder to reverse than interest rate changes,” Daly said in prepared remarks for the Western Economic Association International annual conference. She did not comment on the current economic or policy outlook. “Words set expectations, and those can be difficult to change if the economy behaves differently than expected.”
In 2021, the Fed said it would continue growing its balance sheet and would not raise interest rates until inflation stayed above its 2% target for a while. This approach made sense then because inflation had been below 2% for years. However, many analysts and Fed officials now believe this clear guidance delayed the Fed’s response to rising inflation.
“The lesson for me is that being too definite in very uncertain times has a cost,” Daly said. She added that the central bank should be more flexible and adaptable in how it communicates with the public.
The Fed is currently reviewing its policy framework. Daly said her comments were not directly about that review. The Fed is also expected to update how it communicates, including possible changes to its “dot plot,” which shows policymakers’ expected interest rate paths and helps markets understand where rates might go.
