As Kevin Warsh, who took office as chairman of the U.S. Federal Reserve in May, announced plans to scrap forward guidance—advance signals on the direction of monetary policy—central bank heads in Europe and other countries are moving to reduce such advance signaling.
According to Axios on Tuesday, central bank governors attending the "European Central Bank (ECB) Forum on Central Banking" held in Sintra, Portugal, agreed that they should reduce communication about the future direction of monetary policy. Axios interpreted this as follows: "Warsh's appointment as Fed chairman is serving as a catalyst for turning a page on the monetary policy of the past several decades."
At the meeting, many central bank governors indeed expressed negative views on forward guidance. ECB President Christine Lagarde said, "If there is one regret I have, it is that I was tied down by forward guidance." Bank of England Governor Andrew Bailey likewise pointed out, "Forward guidance is easy to introduce but difficult to withdraw," adding, "You can too easily become locked in by forward guidance."
Warsh said, "I hadn't fully appreciated that my colleagues in the global central banking community have the will to return to first principles, and confirming this is incredibly reassuring." He added, "We have been weighed down by the policies the Fed created during the 2008 crisis," and, "Now is a rare opportunity to return to first principles and ask essential questions."
Warsh is pushing to abolish forward guidance, arguing that many of the policies the Fed created during the 2008 global financial crisis should be reviewed. He did not offer his views on the dot plot released at the Fed's Federal Open Market Committee (FOMC) meeting on June 17, the first held under his leadership. The dot plot is a chart showing Fed members' projections for the base rate, which the market uses to gauge the future direction of monetary policy.
While central bank governors agreed on the broad direction of reducing forward guidance, their methods differed. Lagarde said she would reject forward guidance but accept "framework guidance," which explains to financial markets and the public how the ECB's decisions are made. Warsh, by contrast, takes a negative stance on explicitly revealing the Fed's decision-making in any form.
After the 2008 global financial crisis, as base rates around the world converged toward zero and tools for market intervention diminished, central banks used forward guidance—mentioning the future direction of rate operations in advance—as a supplementary policy tool. It is true that forward guidance provided hints about the direction of interest rates and brought stability to financial markets destabilized by the crisis. But now, 18 years after the financial crisis, critics argue that words already spoken instead constrain central banks' decision-making.
