Understanding the Aspects of Federal Reserve Forward Guidance

I show that the nature of the Federal Open Market Committee’s (FOMC’s) forward guidance language shapes the private sector’s responses to monetary policy statements. From February 2000 to June 2003, the FOMC only gave forward guidance about economic outlook risks, and a decrease in the expected federal funds rate path caused stock prices to fall, GDP growth forecasts to fall, and the unemployment rate to rise. From August 2003 to May 2006, the FOMC added forward guidance about policy inclinations, and a decrease in the expected federal funds rate path had the opposite effects. These results suggest that forward guidance that emphasizes economic outlook risks causes stronger information effects than forward guidance that emphasizes policy inclinations. (JEL D83, E52, E58, E66)

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Perspectives From the Past for the Federal Reserve’s Monetary Policy and Communication

International Journal of Financial Research ◽

10.5430/ijfr.v10n1p31 ◽

2018 ◽

Vol 10 (1) ◽

pp. 31

Author(s):

Arto Kovanen

Keyword(s):

Monetary Policy ◽

Interest Rate ◽

Financial Crisis ◽

Federal Reserve ◽

Policy Decisions ◽

Forward Guidance ◽

Policy Communication ◽

Communication Practices ◽

Future Policy ◽

Future Direction

In this paper we analyze the Federal Reserve’s policy and communication patterns during earlier tightening cycles to gain perspectives into the Federal Reserve’s post-financial crisis monetary policy decisions and communication practices. While each interest rate cycle is unique, as is evident in the post-financial crisis normalization episode, there are regularities that could help inform us about future policy directions. In the post-financial period, the Federal Reserve has placed a great deal of emphasis on policy communication, in particular on its forward guidance, to minimize ambiguity about the future direction of monetary policy. We examine forward guidance during the earlier interest rate cycles and identify some common elements in the Federal Reserve’s communication practices, which would be useful in interpreting the Federal Reserve’s policy actions. This leads us to conclude that it would not be uncharacteristic for the Federal Reserve to suspend its campaign of raising interest rate at this stage of the normalization process, even if inflation risk remains. This underscored the importance of judgment in policy decisions, in part due to uncertainty about the neutral rate of interest, which is a benchmark that the Federal Reserve frequently refers to. In addition, historical trends in economic variables reveal patterns that could assist in evaluating the Federal Reserve’s current and future policy decisions.

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Forward Guidance during the Pandemic: Has It Changed the Public’s Expectations?

Economic Commentary (Federal Reserve Bank of Cleveland) ◽

10.26509/frbc-ec-202027 ◽

2020 ◽

pp. 1-7

Author(s):

Wesley Janson ◽

Chengcheng Jia

Keyword(s):

Federal Reserve ◽

Gdp Growth ◽

Federal Funds ◽

Federal Funds Rate ◽

The Public ◽

Economic Fundamentals ◽

Forward Guidance ◽

The Difference ◽

Future Policy

In responding to the COVID-19 crisis, the Federal Reserve has both lowered the federal funds rate and provided forward guidance. We study whether the forward guidance given with the April and June 2020 FOMC meetings altered the public’s expectations of future policy rates, GDP growth, and inflation. We find that forward guidance was effective in altering the public’s expectations about future policy rates if it was accompanied by an SEP but not expectations about economic fundamentals. We suggest that the difference might be explained by FOMC statements being interpretable in two different ways and the public not having a dominant view on which interpretation was intended.

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The Priority of Democracy

10.23943/princeton/9780691151236.001.0001 ◽

2011 ◽

Cited By ~ 108

Author(s):

Jack Knight ◽

James Johnson

Keyword(s):

Decision Making ◽

Monetary Policy ◽

Political Institutions ◽

Federal Reserve ◽

Democratic Politics ◽

Institutional Choice ◽

Democratic Process ◽

Strong Case ◽

The Subject ◽

The Relationship

Pragmatism and its consequences are central issues in American politics today, yet scholars rarely examine in detail the relationship between pragmatism and politics. This book systematically explores the subject and makes a strong case for adopting a pragmatist approach to democratic politics—and for giving priority to democracy in the process of selecting and reforming political institutions. What is the primary value of democracy? When should we make decisions democratically and when should we rely on markets? And when should we accept the decisions of unelected officials, such as judges or bureaucrats? This book explores how a commitment to pragmatism should affect our answers to such important questions. It concludes that democracy is a good way of determining how these kinds of decisions should be made—even if what the democratic process determines is that not all decisions should be made democratically. So, for example, the democratically elected U.S. Congress may legitimately remove monetary policy from democratic decision-making by putting it under the control of the Federal Reserve. This book argues that pragmatism offers an original and compelling justification of democracy in terms of the unique contributions democratic institutions can make to processes of institutional choice. This focus highlights the important role that democracy plays, not in achieving consensus or commonality, but rather in addressing conflicts. Indeed, the book suggest that democratic politics is perhaps best seen less as a way of reaching consensus or agreement than as a way of structuring the terms of persistent disagreement.

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