Mark Wynne at the Dallas Fed has a useful compact history of the evolution of Fed communications. His 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. Not only is policy conditionality state dependent, but it is also wrapped in time dependency (when they say, for example, that rates will remain low long after some threshold has been reached). This makes for a confusing recipe. Mark Carney, for example, has had to do a lot of “tongue twisting” about “evolving” forward guidance! The Fed will come to that point soon.
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.
Market Monetarists suggestion is to ditch the inflation target (which has been put on hold anyway) and adopt an NGDP level target.