Forward guidance is most effective if kept simple and explicit, Federal Reserve Bank of San Francisco President and CEO John C. Williams said Friday.
Forward guidance "is most effective when it's both simple and explicit," Williams told a monetary policy forum in New York, according to prepared text released by the Fed. "Vague hints about future policy seem to be ineffective."
Comparing guidance to a sledgehammer, Williams noted, "strongly worded forward guidance can be a powerful tool when it's needed. But, like a sledgehammer, care needs to be taken when and where it is used."
He noted that text books say, "forward guidance is superfluous and should leave no imprint on the data." But, he suggested, the books should "relax some assumptions about the public's information set."
Speaking at the same forum, Federal Reserve Governor Jerome H. Powell noted, "Time-based guidance is found to have certain bad characteristics and should be avoided, except at the zero lower bound and when other options are not available or not working."
Time-based guidance could "reduce the sensitivity of rates to incoming macroeconomic data, suppress volatility, encourage risk-taking and increased leverage, and threaten financial stability," Powell said., according to prepared text released by the Fed. "It may also put policymakers in a box when changes in the economy make it optimal to deviate from previously expressed guidance, but the Committee cannot do so without losing credibility."
