IMF Chief Economist Backs Powell's Shift Away From Rate Guidance

Pierre-Olivier Gourinchas, the IMF’s chief economist, said Federal Reserve Chair Kevin Warsh was right to scale back the Fed’s pre-commitment to future interest rate moves, calling the change “completely appropriate.” In an interview with Reuters, Gourinchas said central banks’ forward guidance has acquired a “bad reputation” in recent years because it has tied policymakers’ hands even after economic conditions changed.

He argued that one reason the Fed struggled to respond quickly to the sharp inflation surge of 2021 and 2022 was that it had previously committed to keeping rates low. “The Fed in the past committed to keeping interest rates low, and therefore did not act quickly when inflation surged. That is not a sustainable approach,” he said.

Warsh, who took over as Fed chair last month, has already begun changing how the central bank communicates with markets. In his first rate decision as chair, the Fed issued a shorter statement with no hint about likely moves in upcoming meetings, a sharp break from the approach used in recent years.

Gourinchas stressed that central banks should not stop guiding markets altogether. “There always needs to be some degree of guidance, so markets can form expectations about long-term interest rates,” he said. He added that even without explicit commitments, central banks still influence investor expectations through their messaging. The comments were the first by a senior IMF official on the Fed’s new communication policy, after years in which the IMF urged central banks to be as transparent as possible to anchor inflation expectations and reduce market volatility.