Global: A Trend of Re-examining Financial Policy Frameworks

■ Following the US, the Eurozone has also hinted at a re-evaluation of its forward guidance.  
■ As the monetary policy cycle shifts, the shortcomings of the communication methods established in the 2010s are increasingly being recognized. 
 
In her keynote speech at the European Central Bank (ECB) Forum in Sintra, Portugal, from June 29 to July 1, ECB President Christine Lagarde introduced a new concept called "Framework Guidance," pointing out certain drawbacks of the current complex forward guidance. Her core argument is that, with the economic environment changing since the 2010s, reliance on unconventional monetary policy tools, including forward guidance, should be reduced, returning to traditional monetary policy centered on adjusting policy interest rates. She also mentioned the need to correct the deficiencies of the existing policy framework (referred to as "innovation" in her speech) and to re-examine the approach of making policy judgments based on single indicators or single scenarios. The actual effectiveness of "Framework Guidance" as a new policy tool remains to be further evaluated. However, following the US Federal Open Market Committee (FOMC)'s withdrawal of forward guidance at its June 16-17 meeting, the Eurozone is now also signaling a re-evaluation of its forward guidance. This indicates that the trend of revising the current monetary policy framework established in the 2010s is gradually expanding globally. 
 
In the United States, the minutes of the June 16-17 FOMC meeting, released on July 8, showed that participants discussed various scenarios regarding the economic and monetary policy outlook; several members supported significant revisions to the statement, while a majority believed that streamlining the statement was advantageous. In a speech on July 6, Federal Reserve Governor Waller stated that while forward guidance will remain a useful policy tool, it can sometimes hinder policy decisions. He argued that overly rigid guidance could weaken the transmission effect of monetary policy. In this speech, he further pointed out that when economic trends and policy interest rate paths outside the main scenario also have a certain probability of occurring, it is difficult to formulate uniform guidance applicable to all scenarios. Therefore, maintaining sufficient flexibility is a necessary condition for improving the effectiveness of forward guidance. This view may become an important clue for observing the evolution of the Federal Reserve's communication methods in the future. 
 
From the above trends, it can be seen that while central banks around the world still recognize the effectiveness of forward guidance, they are also gradually becoming aware of its drawbacks. The backdrop for re-evaluating forward guidance lies in the shift in the primary task of monetary policy from addressing disinflation in the 2010s to addressing inflationary pressures in the 2020s. As monetary policy enters a new cyclical transition phase, the existing communication framework is gradually becoming a constraint on policy's ability to respond quickly to economic changes. While guiding financial market expectations through policy communication has proven effective when trends are clear, it is expected that central banks will gradually adjust their communication methods during periods of increased uncertainty to more fully reflect the uncertainties of the future economic environment.