“Forward Guidance” – the new standard in Fed communications

Mark Wynne at the Dallas Fed has a useful compact history of the evolution of Fed communications:

Introduction

Twenty years ago, when the Federal Open Market Committee (FOMC) decided to alter the stance of monetary policy by raising or lowering interest rates, it did not announce that fact to the general public. Rather, financial market participants were left to divine what the FOMC had decided by watching the behavior of the “open market desk” in securities markets.1

Today, when the FOMC decides to change the stance of monetary policy, it releases a detailed statement outlin­ing the rationale for its decisions. The Chairman holds press conferences four times a year, and FOMC members give numerous speeches and press interviews to explain their thinking.2

FOMC communications have changed radically over the past two decades. These changes have proven especially important in the current environment, where it is no longer feasible to adjust interest rates to provide monetary accommodation. By communicating its beliefs about the likely stance of monetary policy over the coming months and quarters, the FOMC can support the ongoing recovery.

Conclusion

Best practices in central banking call for transparency in policy deliberations and communicating the outcome in a timely manner. Over the past two decades, the FOMC has gone from being quite secretive in its deliberations to very transparent. As the committee has had to deal with the worst financial crisis since the Great Depression and exhausted conventional options, unconventional monetary policy has played a greater role. And within the class of unconventional monetary policies, forward guidance— that is, communication about the likely future course of policy conditional on economic developments—has taken on more importance. This move to increased transparency has been integral in helping the FOMC fulfill its mandate.

I wonder if the highlighted sentence above is true. Basically because the “conditionality” is too vague.

The new “communications standard” is examined in depth by a (downloadable) new e-book. I think the book editor, Wouter den Haan points the finger at the problem when he says:

Forward guidance shares the basic economic logic that links today’s decisions to future expectations, but it differs in its subject. Forward guidance focuses on the instruments of monetary policy rather than the targets of monetary policy.

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