The International Monetary Fund said it intends to engage with central banks in the months ahead on changes in how they use forward guidance, reflecting a growing conversation among policymakers about the merits and limits of the communication tool.
Petya Koeva Brooks, deputy director of the IMF's research department, told reporters that while forward guidance has proved valuable in earlier periods - notably at the zero lower bound - it is natural for authorities to reassess both the scope and the modalities of such guidance over time.
Brooks emphasized that any discussion about altering forward guidance does not remove the broader need for clear central bank communication. "In a highly uncertain environment, I think central bank communications is key in terms of giving a sense of (how) central banks think about the shocks and their impact, and on the monetary policy stance," she said.
The comments come as the new U.S. Federal Reserve chair, Kevin Warsh, who took office in May, has signaled a move toward reducing the Fed's reliance on forward guidance. At his first policy meeting as chair, Warsh organized a unanimous decision around a pared-back policy statement that removed references to what actions the central bank might take in the near term.
Warsh reiterated his position at a recent panel at the European Central Bank's forum in Sintra, Portugal, saying central banks should base judgments on "what’s happening in the real economy." Leaders from other major central banks - European Central Bank President Christine Lagarde, Bank of England Governor Andrew Bailey and Bank of Canada Governor Tiff Macklem - also voiced reservations about forward guidance during the same event.
Brooks said the IMF is taking note of these developments and intends to engage on the issue. She added that although forward guidance has been especially useful when policy rates were at the zero lower bound, it is reasonable to revisit how it is used as circumstances and understanding evolve: "Forward guidance has been a useful tool in the past, especially at the zero lower bound, but I think it’s only natural as time goes by, and as we learn more, to kind of revisit the scope and again the modalities of that forward guidance," she said.
The debate over forward guidance has also been reflected in comments from other IMF figures. Pierre-Olivier Gourinchas, the IMF's former chief economist, said before his departure last month that it was appropriate for central banks to move away from "strong forms" of forward guidance, which in the past had effectively committed policymakers to future actions regardless of how economic conditions evolved.
Taken together, these remarks signal a period of active reassessment at major central banks about how much they should bind themselves to forward-looking commitments and how they can best communicate their assessment of shocks and policy stance in an environment the IMF describes as uncertain and volatile.
Summary
The IMF plans to consult with central banks on changing uses of forward guidance. The institution underlined continued importance of communication amid uncertainty even as U.S. and other central bank leaders reconsider how strongly to anchor future policy signals.
Key points
- IMF deputy research director Petya Koeva Brooks said the fund hopes to engage with central banks in coming months on changes to forward guidance and stressed the need for clear communication in uncertain times.
- New Fed Chair Kevin Warsh has moved to scale back forward guidance, removing near-term action language from his first policy statement and reiterating a focus on real-economy data at a recent central bank forum.
- Other central bank leaders, including Christine Lagarde, Andrew Bailey and Tiff Macklem, expressed similar reservations about forward guidance at the ECB forum, indicating a broader reassessment among major policymakers.
Risks and uncertainties
- Changes to forward guidance could create short-term market uncertainty as investors and institutions adjust to less explicit policy signaling - a factor that would principally affect financial markets and interest-rate-sensitive sectors.
- Reduced commitment in guidance may complicate expectations management, potentially increasing volatility if stakeholders interpret less-direct communication inconsistently.
- Moving away from "strong forms" of forward guidance could make it harder for some market participants to anticipate policy paths, affecting borrowing costs and other conditions in banking and credit markets.