![]() Just so, central bankers routinely discuss macroeconomic fundamentals and outcomes objectively while forecasting their own likely responses to future developments. The former gets its name from the oracle of Delphi, who forecasted the future but promised nothing. ( 2012) introduced the theoretical distinction between Delphic and Odyssean forward guidance. To better understand FOMC communication policy, Campbell et al. 2 While the specificity of the Evans rule was dropped in March 2014, the statement has continued to highlight that any future policy tightening will be closely tied to tangible evidence about the state of the economy. 1 In December 2008, the committee began using language that the funds rate would remain exceptionally low for “some time.” In March 2009, the FOMC replaced “some time” with “extended period.” The FOMC introduced calendar-based forward guidance in August 2011, when the corresponding statement indicated that exceptionally low levels of the funds rate would remain in place “at least through mid-2013.” The Evans rule, whereby the maintenance of low rates is tied to specific economic conditions, replaced the calendar-based language in the December 2012 statement. Most notably, the FOMC repeatedly stated its expectation of maintaining low interest rates in the wake of the 2001 recession for a “considerable period.” Once the removal of that accommodation was underway, the committee consistently forecasted that it would be removed “at a pace that is likely to be measured.”Īfter the FOMC cut the federal funds rate to its effective lower bound (ELB) in December 2008, even more explicit forward guidance became one of the only tools available to it for providing monetary accommodation. As the FOMC followed the subsequent trend set by inflation-targeting central banks toward greater transparency regarding its policy goals and actions, its statement’s forward-looking language expanded. In May 1999, the committee added forward-looking language to its statement that indicated whether the balance of risks to the achievement of its dual mandate was tilted toward undesirable inflation or output performance. Although these began as terse announcements of anticipated tightening and loosening in money markets, the FOMC soon routinely announced its policy rate decision and justification for it within the context of the committee’s macroeconomic outlook. Since its February 1994 meeting, the FOMC has typically made a postmeeting statement. Indeed, the FOMC typically issued no communication at a meeting’s conclusion, and market participants were left to infer any policy rate change from the trading activity of the System Open Market Account desk. Before 1994, the change in the Fed funds rate was the only policy action taken on a meeting date. ![]() Over the last thirty years the FOMC completely revised its communications policy, eventually making guidance about the future path of the funds rate a central component of those communications. We show that our results do not reflect Del Negro, Giannoni, and Patterson’s (2015) forward-guidance puzzle. However, starting toward the end of 2011, after the Fed’s introduction of “calendar-based” communications, the FOMC’s Odyssean guidance appears to have boosted real activity and moved inflation closer to target. ![]() We find that a purely rule-based policy would have delivered a shallower recession and kept inflation closer to target in the years immediately following the crisis than FOMC forward guidance did in practice. To this end we usean estimated medium-scale New Keynesian model to perform a counterfactual experiment for the period 2009:Q1–2014:Q4, in which we assume the FOMC did not employ any Odyssean guidance and instead followed its reaction function from before the crisis as closely as possible while respecting the effective lower bound. We then examine whether the FOMC used Odyssean guidance to improve macroeconomic outcomes since the financial crisis. However, a large fraction of futures rates’ variability on announcement days remains unexplained, leaving open the possibility that the FOMC has successfully communicated Odyssean guidance. We begin by using high-frequency identification and direct measures of FOMC private information to show that puzzling responses of private-sector forecasts to movements in federal funds futures rates on FOMC announcement days can be attributed entirely to Delphic forward guidance. This chapter studies the effects of FOMC forward guidance.
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