Fed's Waller: Fed policymakers have always been committed to inflation target, it is a 'credible pledge'

Thank you, Isabel, and thank you to the organizers for the invitation to be part of this discussion.1 As we get closer to the dinner hour, I will give you two thoughts to chew on about how monetary policy transmission has worked in the recent past and how that affects my view of appropriate actions when facing current challenges. The first of these is that initial conditions are crucial. To decide where policy should go, you need a clear sense of where you are starting from. By "initial conditions," I mean what is currently happening—not some average of experience in the past. This lesson was brought home to me during the rapid escalation of inflation in the United States following the pandemic. Based on past experience, a considerable share of the economic profession believed that the rapid tightening of financial conditions needed to bring down inflation would unavoidably cause a sharp increase in unemployment. And while this expectation was a good summary of what had happened in the past, in 2022, it was a poor predictor of what would happen from tightening policy because initial conditions at that time were so different. In particular, the combination of a negative labor supply shock along with a booming economy fueled by fiscal and monetary stimulus led to a situation in early 2022 where the ratio of job vacancies to unemployed workers was 2—a level never seen before. This initial condition for job vacancies was critical to understanding how tightening monetary policy would affect the labor market. Historically, changes in labor demand had minor Fed's Waller: Forward guidance can be a hindrance if it is too strong or rigid. Fed's Waller: Forward guidance also problematic when policymakers confront different economic outcomes all with a significant probability of occurring. Fed's Waller: When it works, forward guidance can speed the impact of monetary policy, as in late 2021. Fed's Waller does not comment on current economic policy outlook.

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