Search Results
Journal Article
Federal Reserve: The Future of Forward Guidance
For much of the Fed's history, its leaders prided themselves on their inscrutability. 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. But by the end of his tenure, the Fed had become increasingly transparent in its communications with the public. 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 ...
Working Paper
Gauging the Ability of the FOMC to Respond to Future Recessions
Current forecasts suggest that the federal funds rate in the future is likely to level out at a rather low level by historical standards. If so, then the FOMC will have less ability than in the past to cut short-term interest rates in response to a future recession, suggesting a risk that economic downturns could turn out to be more severe as a result. However, simulations of the FRB/US model of a severe recession suggest that large-scale asset purchases and forward guidance about the future path of the federal funds rate should be able to provide enough additional accommodation to fully ...
Working Paper
The Emergence of Forward Guidance As a Monetary Policy Tool
Forward guidance—the issuance by a central bank of public statements concerning the likely future settings of its policy instruments—is widely regarded as a new tool of monetary policy. The analysis in this paper shows that Federal Reserve policymakers from the 1950s onward actually accepted the premises of forward guidance: the notion that longer-term interest rates are key yields in aggregate spending decisions; and the proposition that indications of intentions regarding future short-term interest rate policy can affect longer-term rates. Over the same period, they were nevertheless ...
Journal Article
Has Forward Guidance Been Effective?
A. Lee Smith and Thealexa Becker compare forward guidance announcements with changes in the effective federal funds rate and find the two policy measures have had similar macroeconomic effects.
Working Paper
Forward Guidance: Communication, Commitment, or Both?
A policy of forward guidance has been suggested either as a form of commitment ("Odyssean") or as a way of conveying information to the public ("Delphic"). I analyze the strategic interaction between households and the central bank as a game in which the central bank can send messages to the public independently of its actions. In the absence of private information, the set of equilibrium payoffs is independent of the announcements of the central bank: forward guidance as a pure commitment mechanism is a redundant policy instrument. When private information is present, central bank ...
Working Paper
The COVID-19 Crisis and the Federal Reserve's Policy Response
The COVID-19 pandemic and the mitigation efforts put in place to contain it delivered the most severe blow to the U.S. economy since the Great Depression. In this paper, we argue that the Federal Reserve acted decisively and with dispatch to deploy all the tools in its conventional kit and to design, develop, and launch within weeks a series of innovative facilities to support the flow of credit to households and businesses. These measures, taken together, provided crucial support to the economy in 2020 and are continuing to contribute to what is expected to be a robust economic recovery in ...
Speech
Systematic policy and forward guidance
Money Marketeers of New York University, Inc., Down Town Association, March 25, 2014, New York, NY President Charles Plosser discusses the relationship between systematic policy and forward guidance. He explains how understanding both practices can provide insights into effective monetary policy in normal and unusual times, or in extreme conditions when policy is constrained by the zero lower bound on nominal interest rates.
Working Paper
Forward guidance and the state of the economy
This paper examines forward guidance using a nonlinear New Keynesian model with a zero lower bound (ZLB) constraint on the nominal interest rate. Forward guidance is modeled with news shocks to the monetary policy rule. The effectiveness of forward guidance depends on the state of the economy, the speed of the recovery, the ZLB constraint, the degree of uncertainty, the monetary response to inflation, the size of the news shocks, and the forward guidance horizon. Specifically, the stimulus from forward guidance falls as the economy deteriorates or as households expect a slower recovery. When ...
Working Paper
Strengthening the FOMC’s Framework in View of the Effective Lower Bound and Some Considerations Related to Time-Inconsistent Strategies
We analyze the framework for monetary policy in view of the effective lower bound (ELB). We find that the ELB is likely to bind in most future recessions and propose some ways that theoretical models imply that the framework could be strengthened. We also discuss ways that commitment strategies, which are not part of the framework, may improve economic outcomes. These policies can suffer from a time-inconsistency problem, which we analyze.