![]() As it turned out, however, the Fed soon found itself in a similar position. Its policy rate had been near zero since the mid-1990s. If markets believed the central bank's pledge, then the interest rates of longer maturity securities would fall in anticipation of a lower policy rate in the future, and that would help stimulate economic growth.Įggertsson and Woodford had the Bank of Japan in mind when they wrote their paper. Eggertsson and Woodford showed that a central bank could achieve additional stimulus by credibly communicating an intent to keep its policy rate low into the future after the economy had started to recover - that is, by providing forward guidance. They were exploring how central banks could conduct monetary policy when their policy rate was at or near zero and couldn't go lower. That change coincided with the publication of an important paper earlier the same year by Gauti Eggertsson of Brown University and Michael Woodford of Columbia University. In 2003, it added guidance about the likely path of monetary policy. In February 2000, under Greenspan, the committee first began regularly including an early form of forward guidance in its policy statements: an assessment of the balance of risks facing the economy. That same month, European Central Bank (ECB) President Christine Lagarde said that the ECB would also be ditching forward guidance to maintain the flexibility to adjust monetary policy based on incoming data.ĭo these moves mean that central bankers have soured on forward guidance? Or is it simply the wrong tool for the Fed's present challenges? The Origins of Forward Guidance and not provide … the kind of clear guidance that we had provided on the way to neutral," Powell replied. "We're going to be making decisions meeting by meeting. At the press conference following the July decision, Powell was asked to provide some guidance on how far and how fast the FOMC was thinking about raising rates to deal with inflation. The following month, the committee approved another historic 0.75-point hike. In June, the FOMC voted to raise the Fed's benchmark interest rate by three-quarters of a percentage point - its largest single rate hike in nearly three decades. But recently, Powell indicated that the Fed might be putting that tool back on the shelf, at least for now. This prognosticating language, known as " forward guidance," has become an increasingly important tool for policymakers since the Great Recession of 2007-2009. Today, Fed Chair Jerome Powell holds a press conference after every FOMC meeting, and the committee issues a post-meeting statement explaining both its current policy stance as well as how it expects policy to evolve in the future. ![]() But by the end of his tenure, the Fed had become increasingly transparent in its communications with the public. Alan Greenspan, who served as Fed chair from 1987 to 2006, famously perfected the art of "Fedspeak," carefully crafting his statements on monetary policy to be vague and obscure so that he could avoid roiling financial markets. For much of the Fed's history, its leaders prided themselves on their inscrutability.
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