Fed’s Williams Talks Qualitative Guidance

February 19, 2014

New York, NY — The time is ripe for a return to qualitative forward guidance, said John C. Williams, President and CEO of the Federal Reserve Bank of San Francisco.   

In remarks to the Money Marketeers of New York University, Mr. Williams said that the Federal Reserve’s introduction in 2011 of specific quantitative guidance about the future path of the federal funds rate made sense at the time because, “…the public’s expectations about our policy plans differed sharply from our own.”  In that scenario, he said, quantitative guidance proved “a very powerful, albeit blunt, tool for bringing public expectations…in closer alignment with our own views.”  However, “The situation is very different now.  Public expectations of future monetary policy appear to be reasonably aligned with our own, so there is no problem to ‘fix.’  Instead, our forward guidance should be aimed at providing the public with a good understanding of the key drivers of our policy decisions. ” Explaining how the Fed is likely to respond to economic developments, rather than focusing on specific, quantitative markers, “…avoids the problem of oversimplifying policy decisions down to one or two indicators,” “highlights the various economic factors that influence monetary policy” and “is better suited for the current situation.” 

Williams was generally upbeat about the economy, pointing to the housing market in particular.  “The rebound in the housing sector has broader implications for the economy, positioning it to become a tailwind,” he said.  Also encouraging was progress in federal fiscal policy.  Williams noted that years of economic drag were wrought by tax increases, spending cuts, and the uncertainty produced by political brinkmanship, but that conditions were finally improving, citing last week’s agreement on the debt ceiling.  Williams stressed that economic policy uncertainty has had economic consequences, pointing to research by the Federal Reserve Bank of San Francisco that estimates it increased the unemployment rate by as much as 1¼ percent, as of late 2012, a number that “translates into nearly 2 million lost jobs.”  

Williams warned, however, that risks to the economy remain, particularly inflation, which has been running persistently below the Fed’s preferred rate of 2 percent.  He cited continued domestic economic slack, global economic conditions, and special factors like the low rate of inflation for healthcare costs as the main culprits.  However, he also warned that the high number of long-term unemployed could be skewing data about the amount of slack in the economy, meaning inflation could rise faster than expected.


Matthew Schiffgens
Federal Reserve Bank of San Francisco
(415) 974-3246


The Federal Reserve Bank of San Francisco, with branch offices in Los Angeles, Seattle, Salt Lake City, and Portland, and a cash processing office in Phoenix, provides wholesale banking services to financial institutions throughout the nine western states. As the nation’s central bank, the Federal Reserve System formulates monetary policy, serves as a bank regulator, administers certain consumer protection laws, and is fiscal agent for the U.S. government. Follow us on Twitter at twitter.com/sffedreserve.