IMF chief economist says Fed reduction in rate guidance is 'entirely appropriate'

By Andrea Shalal

WASHINGTON, June 26 (Reuters) - The International Monetary Fund's chief economist on Friday said Federal Reserve Chair Kevin Warsh's plan to reduce forward rate guidance on monetary policy was "entirely appropriate," although central banks would always need to provide some long-term guidance for markets.

Pierre-Olivier Gourinchas, who leaves his post to return to academic life next week, said strong forward guidance had gotten "really bad press" because it committed central banks to some future action, regardless of economic developments.

"That is something that is not tenable, of course," Gourinchas told Reuters in an interview, adding that such rigid guidance had proven to be very costly when U.S. inflation surged in 2021 and 2022 but the Fed did not act quickly because it had earlier promised to keep rates steady.

"So I think moving away from these strong forms of forward guidance is entirely appropriate. Saying there is no forward guidance, I don't think that is actually the case ever. You do it explicitly, or implicitly, the market is going to form a view," he said.

Warsh, who took over as Fed chief last month, has launched an ambitious review that could reshape how the central bank makes decisions and communicates with the public. In his first policy meeting as chair, he organized a unanimous consensus around a stripped-down policy statement that jettisoned any forward guidance on what actions the central bank might take in the near term.

Gourinchas' comments were the first by a senior IMF official on the Fed's new approach. They followed years of entreaties by the global lender that central banks be transparent about their monetary policy plans to ensure that inflation expectations remained anchored.

Gourinchas said the IMF had seen some other central banks moving in the same direction, although many were still under inflation targeting regimes, which were aimed at managing inflation one or two years into the future.

"You need to provide some amount of guidance, so that the market will form some views about what the long-term rates are going to be, and that actually is what's going to have an influence on the conditions," he said.

Even if central bankers were not explicitly stating their expectations, they would respond and correct market expectations if they deviated too much, he said. "If that view somehow is not the one that you want to communicate, central banks will communicate differently, and they will try to guide where they want it to be," he said.

Gourinchas noted that markets, businesses and banks were always looking for clues to guide their investments, set mortgage rates and plan for the future, a push that went beyond the regular meetings of the Federal Open Market Committee to set interest rates.

(Reporting by Andrea Shalal; Editing by Andrea Ricci)