Fed Governor Waller: Clear Policy Reaction Rules Are Needed, Transparency Is Better Than “Never Explain”

According to Jin10, Fed Governor Christopher Waller said the Federal Reserve must establish clear and consistent policy reaction rules, or markets will be unable to make forecasts. He said the specific quantification of the reaction function may have flaws, but it is very important from a qualitative perspective, and he differed sharply from Fed Chair Kevin Warsh on the perfection of the reaction function. On transparency, Waller said there is no benefit to surprising markets, criticized “never explain” as an old model and not a good one, and said it would be better to disclose some future policy direction. Waller also said there are very strong differences within the Federal Reserve on communication, that opposition to scenario analysis was also very strong last year, and that it is still unclear what the communication working group can achieve. On the balance sheet working group, he said he would oppose any proposal that would return reserves to a scarce state. On the data working group, he stressed the need to guard against trust issues, use data that people can verify, and said the inflation working group may be the most helpful for the Federal Open Market Committee (FOMC).