GIC CCB Teton Outlook

Out with the Old, In with the New: Regime Change at the Federal Reserve Remarks by Lael Brainard 1 at the GIC College of Central Bankers Teton Economic Outlook, Jackson Hole, Wyoming 9:15 am MDT, Wednesday, July 8, 2026 The ‘regime change’ underway at the Federal Reserve offers an early opportunity to assess how the emerging era may diverge from the previous on several consequential shifts start to take shape. 2 These are, of course, still early days. Over the coming months, the contours of the new regime will become clearer. And unforeseen events may prove as important in defining this era as any deliberate change in strategy, just as the Great Financial Crisis and the Pandemic Crisis defined the previous era. Even so, the direction of travel is sufficiently clear to explore its implications for monetary policy.

The End of Forward Guidance As had been widely signaled, the new Chair has rejected the use of forward guidance. The strongest case for forward guidance arises when it addresses a time inconsistency problem by effectively committing the central bank to a future policy action that may no longer be optimal when the time comes. 3 There is an important distinction between commitment or Odyssean forward guidance, which commits the Federal Reserve to future policy actions conditional on dates or economic thresholds, and revelatory or Delphic forward guidance, which conveys

Former Vice Chair and Governor of the Federal Reserve Board and Distinguished Fellow, Georgetown Psaros Center for Financial Markets and Policy and Senior Research Fellow, Harvard Kennedy School Mossavar Rahmani Center. I am grateful to Kurt Lewis and Don Kohn for helpful comments.

2 Peterson, Matt. (2026, April 21). Warsh emerges from a difficult hearing with his Fed "regime change" plan intact.

CNBC. CNBC 3 Michael Woodford (2013). "Forward Guidance by Inflation-Targeting Central Banks." In Two Decades of Inflation Targeting. Michael Woodford (2012). "Methods of Policy Accommodation at the Interest-Rate Lower Bound." In The Changing Policy Landscape. Proceedings of the Federal Reserve Bank of Kansas City's Jackson Hole Symposium. Lars E.O. Svensson (2015). "Forward Guidance." International Journal of Central Banking, 11(4), 19– 64. (NBER). Edward Nelson (2021). "The Emergence of Forward Guidance as a Monetary Policy Tool." Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System. (Federal Reserve).

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information about the Federal Reserve's expected policy path without making firm commitments. 4 In practice, commitment forward guidance has been employed only when the federal funds rate was constrained by the effective lower bound. Following the Great Financial Crisis, the Federal Reserve adopted first date-based and later employment-threshold forward guidance.

Threshold-based forward guidance was also employed during the pandemic as successive waves of COVID initially led inflation and employment to drop.

In retrospect, forward guidance proved highly effective in the aftermath of the Great Financial Crisis, when persistently weak demand made credible policy precommitment especially valuable. It ultimately proved to be poorly designed, however, for the sequence of supply shocks associated with the Russia commodity shock and the rolling waves of COVID variants that led to an inflation surge.

Based on these experiences, forward guidance is most valuable when the forecast is unimodal, policy rates are constrained by the effective lower bound, and a commitment to sustained policy accommodation is required to support demand. Outside such circumstances, its benefits diminish while its risks increase. There is consequently a good case under current conditions for the new Chair's decision to dispense with forward guidance. 5 The End of Reaction Function Transparency?

The new Chair also appears inclined to dispense with communication about the reaction function. Forward guidance and reaction function transparency are distinct in important ways. A decision to dispense with forward guidance does not logically imply dispensing with transparency about the reaction function. If sustained, this would represent one of the most consequential departures from the Federal Reserve's strategy in recent decades.

Put simply, a reaction function describes how the Federal Reserve adjusts its primary policy instrument in response to changes in inflation, employment, and economic activity. The case is strong for communicating the reaction function. Indeed, a year ago, the new Chair argued

Campbell, J. R., Evans, C. L., Fisher, J. D. M., & Justiniano, A. (2012). Macroeconomic Effects of Federal Reserve Forward Guidance. Federal Reserve Bank of Chicago Working Paper No. 2012-03.

5 Warsh noted, “…[F]orward-guidance – a tool rolled out to great fanfare in the financial crisis—has little role to play in normal times.“ in “Commanding Heights: Central Banks at a Crossroads.” G30 Spring Lecture, International Monetary Fund, Washington, DC, April 25, 2025.

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for greater clarity, observing: "…[W]e central bankers past and present need to resist whims.

There's a way to have clarity about the reaction function of Central Banks to incoming information.” 6 Yet the new regime dispensed with communication about the reaction function and the baseline outlook in the FOMC June statement, at the press conference, and at the ECB Sintra event. This is a clear departure from the previous era. When asked, the new Chair declined to elaborate beyond the statement. 7 This is a clear departure from the preceding era of increasing transparency and accountability at the Fed. Fed Chair Bernanke was the architect of important transparency reforms -- the 2 percent inflation target, post-meeting press conferences, and Summary of Economic Projections— that were the hallmarks of that era. He argued that transparency about the Fed’s monetary policy strategy is vital to enhance credibility, increase the Fed’s accountability, and tighten the linkage between monetary policy, financial conditions, and the economy. 8 Even Chair Greenspan, despite a reputation for discretion and ambiguity, moved the institution toward greater transparency about the reaction function. In 1999, the FOMC began publishing the Committee's intermeeting policy bias, or "tilt," in its directive to the New York Fed's trading desk. A year later, that evolution continued with the introduction of "balance of risks" language in the post-meeting statement. 9 Dispensing with forward guidance makes sense under current conditions. Dispensing with transparency about the reaction function does not. The former limits commitments about future policy actions; the latter limits public understanding of how policymakers map incoming information to policy actions. It turns monetary policy into a black box. Reaction function “Warsh, K. (2025, July 8). Inflation Is a Choice: Kevin Warsh on Fixing the Federal Reserve. Interview by Peter Robinson. Uncommon Knowledge, Hoover Institution. Hoover Institution transcript.

7 The Chair stated, ““I’ve got nothing more to say than the statement itself.” FOMC June 2026 Press Conference Transcript 8 … I believe…that transparency in monetary policy enhances public understanding and confidence, promotes informed discussion of policy options, increases the accountability of monetary policymakers for reaching their mandated objectives, and ultimately makes policy more effective by tightening the linkage between monetary policy, financial conditions, and the real economy,” Bernanke, Ben S. (2013). Communication and Monetary Policy. Speech delivered at the National Economists Club Annual Dinner (Herbert Stein Memorial Lecture), Washington, D.C., November 19, 2013. Board of Governors of the Federal Reserve System.

9 Hat tip to Don Kohn. Lindley, David. (2003, June 24). “A Modern History of Federal Reserve Communications: 1975-2002,” Federal Reserve Board. https://www.federalreserve.gov/monetarypolicy/files/FOMC20030624memo01.pdf?utm_source=chatgpt.com 6

transparency has long been viewed not simply as a communications preference, but as an important mechanism for improving policy effectiveness, anchoring expectations, and ensuring Fed accountability.

Reaction Function Transparency and Price Discovery There is a literature on transparency and ambiguity that sheds some light on this debate. 10 The motivation for reducing transparency offered by the new leadership has some connection to the "hall of mirrors" problem discussed by Chair Bernanke and Vice Chair Clarida, the underlying concern is actually quite different. 11 Bernanke argued that policymakers should monitor federal funds futures “as a check on the efficacy of our communication,” but not to meet the market's policy expectations, which he noted “quickly degenerates into a hall of mirrors." 12 Undue sensitivity to bond market volatility is a related but distinct concern raised by the new leadership. Stein and Sunderam argued that an undue concern to avoid surprising financial markets could foster excessive policy gradualism. A central bank reluctant to surprise investors may ultimately generate greater volatility by delaying necessary action until markets are forced to adjust abruptly. 13 The Federal Reserve's decision to telegraph its first 75-basis-point rate increase in 2022 could be viewed as an effort to avoid precisely this kind of trap. Although questions were raised about how that information reached the public, there was substantial support for taking decisive as opposed to gradual action in confronting the sharp rise in inflation.

However, the concern articulated by the new Chair is different in both motivation and implication: He explained that communicating the Federal Reserve's reaction function and

Alex Cukierman and Allan H. Meltzer, 1986, "A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information," Econometrica 54, no. 5 (September 1986): 1099–1128. Jon Faust and Lars E. O. Svensson, 2001, "Transparency and Credibility: Monetary Policy with Unobservable Goals," International Economic Review 42, no. 2 (May 2001): 369–397. Jon Faust and Lars E. O. Svensson, 2002, "The Equilibrium Degree of Transparency and Control in Monetary Policy," Journal of Money, Credit and Banking 34, no. 2 (May 2002): 520–539.

11 Ben S. Bernanke, "What Policymakers Can Learn from Asset Prices," speech delivered at the Investment Analysts Society of Chicago, Chicago, Illinois, April 15, 2004; reprinted in BIS Review No. 21/2004. Richard H. Clarida, "The Federal Reserve's New Framework: Context and Consequences," remarks at the 2021 U.S. Monetary Policy Forum, New York, February 26, 2021.

12 Ben S. Bernanke, "What Policymakers Can Learn from Asset Prices," speech delivered at the Investment Analysts Society of Chicago, Chicago, Illinois, April 15, 2004; reprinted in BIS Review No. 21/2004.

13 Jeremy C. Stein and Adi Sunderam, 2015, Gradualism in Monetary Policy: A Time-Consistency Problem?

National Bureau of Economic Research Working Paper No. 21544, September 2015. Jeremy C. Stein and Adi Sunderam, 2018, "Gradualism in Monetary Policy: A Time-Consistency Problem?" Journal of Finance 73, no. 5 (October 2018): 2245–2274.

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outlook contaminates market price discovery, reducing the informational value of asset prices that he deems to be “probably the most important source of information to guide central bankers.” 14 According to this logic, communicating the Federal Reserve's reaction function and outlook contaminates market price discovery, reducing the informational value of asset prices for policymakers themselves.

That is an important claim, but it sits uneasily with much of the existing literature. 15 It differs from Bernanke’s account where market pricing is a valuable measure of how well the Fed communicates its reaction function, not an independent source of information that would be contaminated by that communication.

More broadly, asset prices contain noise arising from changes in risk premia, investor positioning, liquidity conditions, and shifting correlations that are entirely independent of Federal Reserve communications. As Svensson argued in a related context, concerns that central bank communication will overwhelm private information are persuasive only if official communication carries a lower signal-to-noise ratio than market participants' private information. 16 That argument is difficult to apply to the Federal Reserve's own explanation of how it conducts monetary policy.

If anything, there is a strong case that Federal Reserve transparency about its own reaction function should enhance, rather than diminish, the informational content of market prices. Markets become more informative—not less—when participants understand how policymakers are likely to respond to new information.

In contrast, there is a strong case for policymakers to refrain from commenting immediately on new economic information, such as official releases on inflation, employment, or other key macroeconomic data. Doing so allows markets to incorporate new information about Board of Governors of the Federal Reserve System. (2026, June 17). Transcript of Chairman Warsh’s Press Conference (June 16–17, 2026 FOMC Meeting). Federal Open Market Committee. https://www.federalreserve.gov/monetarypolicy/fomcpresconf20260617.htm 15 Alex Cukierman and Allan H. Meltzer, 1986, "A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information," Econometrica 54, no. 5 (September 1986): 1099–1128. Jon Faust and Lars E. O. Svensson, 2001, "Transparency and Credibility: Monetary Policy with Unobservable Goals," International Economic Review 42, no. 2 (May 2001): 369–397. Jon Faust and Lars E. O. Svensson, 2002, "The Equilibrium Degree of Transparency and Control in Monetary Policy," Journal of Money, Credit and Banking 34, no. 2 (May 2002): 520–539.

16 Jeffery D. Amato, Stephen Morris, and Hyun Song Shin, 2002, "Communication and Monetary Policy," Oxford Review of Economic Policy 18, no. 4 (Winter 2002): 495–503. Lars E. O. Svensson, "Social Value of Public Information: Comment: Morris and Shin (2002) Is Actually Pro-Transparency, Not Con," American Economic Review 96, no. 1 (March 2006): 448–452. https://doi.org/10.1257/000282806776157650 14

the economy unadulterated by Fed commentary, which enables policymakers to observe how investors independently interpret developments in the economy. That standing convention serves a different objective from withholding transparency about the Federal Reserve's own reaction function. The former preserves the integrity of market signals about economic developments; the latter obscures the framework through which policymakers interpret those signals.

Policy Implications In my view, the deletion of the easing bias in the June FOMC statement and the SEP’s upward shift of inflation and interest rate projections this year were appropriate adjustments to data that had come in better on employment and hotter on inflation since the previous statement and SEP. Similar to arguments I made in 2022, although an isolated supply shock may reasonably be viewed as transitory, the cumulative effect of three successive inflationary shocks—from tariffs, higher oil prices, and AI-related electronics— should be treated as potentially persistent, especially with core inflation beginning the year above 3 percent and moving higher. 17 But at this stage, it is difficult to discern the new Fed's assessment of either the economic outlook or the appropriate stance of monetary policy. Some uncertainty is inevitable during a leadership transition, but the deliberate reduction in communication about the baseline outlook, the balance of risks, and the reaction function makes that task considerably more difficult.

Market pricing has shifted strongly in opposite directions within the span of two weeks, unrelated to new economic data. Following the emphasis on price stability and the hawkish shift in the SEP at the June meeting, two-year Treasury yields recorded their largest increase since the Liberation Day tariff announcement. Two weeks later, yields retraced sharply on comments by the Chair that inflation risks had diminished. While volatility is not a concern on its own, increased volatility in the absence of significant new economic data may/ reflect, at least in part, confusion about the Federal Reserve's new reaction function.

The announcement of five new task force reviews is a welcome development that may lead to improvements in the Federal Reserve’s approach down the line. But in the near term, they

Lael Brainard. (2022, delivered June 24, published November 28). What can we learn from the pandemic and the war about supply shocks, inflation, and monetary policy? Board of Governors of the Federal Reserve System.

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raise the possibility that policy action may be deferred and uncertainty about the reaction function may be prolonged until the task force reviews conclude.

The task force on productivity illustrates the uncertainty. The new Chair has repeatedly emphasized the longer-run disinflationary potential of artificial intelligence through stronger productivity growth, rather than the more immediate inflationary pressures associated with the current AI investment boom emphasized by some other policymakers. Which of these aspects will dominate the Committee's near-term policymaking remains unclear.

Similar ambiguity surrounds the reviews of existing data and the inflation framework.

The new Chair has expressed a preference for the Dallas Fed's trimmed mean measure of core inflation, while describing headline PCE inflation as a ‘rough swag’ or less informative guide. 18 It is notable that the Dallas Fed trimmed mean inflation measure has been closer to the Federal Reserve's target than alternative measures. And in a separate twist, the Chair previously argued that changes in the Federal Reserve's preferred inflation measure risk undermining the institution's credibility: 19 The task forces may yield important improvements down the line. But in the near term, they could add to uncertainty about monetary policy strategy.

A Return to Discretion?

In sum, the Fed under new leadership is advancing a new approach that is a deliberate departure from the previous era of transparency. It is dispensing not only with forward guidance but also with transparency about the reaction function, on the view that such transparency might contaminate asset price discovery. Financial markets are struggling to interpret these changes— moving sharply on Fed news in opposite directions within the span of 2 weeks in the absence of new economic data. The five new task force reviews may bring welcome improvements down the line, but they add to uncertainty in the near term. Prolonged uncertainty could prove costly to Fed credibility if inflation persists. There are good reasons to dispense with forward guidance in current conditions and to tolerate greater bond market volatility, but that does not argue for

Peterson, Matt. (2026, April 21). Warsh emerges from a difficult hearing with his Fed "regime change" plan intact. CNBC. CNBC 19 "...[F]requent changes to the Fed's metrics-- including its professed preferred measures of inflation-- are beneath the high standing of the central bank." Warsh, Kevin. 2025. “Commanding Heights: Central Banks at a Crossroads.”

G30 Spring Lecture, International Monetary Fund, Washington, DC, April 25, 2025.

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turning the reaction function into a black box. To the contrary, providing a clear understanding of how economic developments are likely to influence policy decisions is central to anchoring expectations, sustaining Fed credibility, and promoting the effective transmission of monetary policy.