US Rates Strategy · Key principles rather than forward guidance

Key arguments

• Warsh is deeply critical of forward guidance, especially deterministic, pre-committed guidance used during crises, arguing it leads to policy errors once the economy normalizes.
• Forecast-based guidance works 'better in the lab than in the field' as FOMC members consistently forecasted inflation would return to 2% despite signs it wasn't after COVID.
• Policy should be guided by 'key principles' focusing on trends rather than isolated data, implemented through short-term interest rates, with PCE as the price stability measure.
• Attention should be paid to money created by the central bank, likely referring to the balance sheet size, and wages are less helpful for predicting inflation.
• The principles are not detailed enough to understand how the Fed will respond to different scenarios, leaving the Fed and markets in a 'hall of mirrors'.

Corresponding source evidence

1. Warsh remains deeply critical of forward guidance particularly the sort used during the financial crisis and during COVID. He argues that deterministic, pre-committed guidance leads to policy errors once the economy normalizes as occurred after COVID. · medium_term
2. He argues that forecast-based guidance works “better in the lab than in the field” . For example, he notes that FOMC members consistently forecasted inflation would return to 2% despite signs it wasn’t after COVID. · medium_term
3. Instead, he believes policy should be guided by a set of “key principles” . This means putting more emphasis on “trends” rather than “isolated data”. Policy is implemented through changes in short-term interest rates; rather than QE. · medium_term