Forward Guidance > Data Dependency = The Fed's New Communications Mantra

 



The Fed is still the dominant influence on global monetary policy, but it now finds itself operating in a more multi-polar world.

U.S. Federal Reserve Governor Jerome H. Powell @ The 2016 U.S. Monetary Policy Forum

New York, New York

February 26, 2016

Discussion Of The Paper

"Language After Liftoff: Fed Communication Away From The Zero Lower Bound"

This paper reviews Federal Open Market Committee (FOMC) communications from the time the Committee began issuing regular postmeeting statements in 1999 to the present.
The authors provide an extended and insightful discussion of the theory and practice of providing forward guidance about monetary policy. They offer one central lesson: Data-based forward guidance is mostly good, while time-based forward guidance is mostly bad.
The authors show that data-based guidance has desirable characteristics and can make monetary policy more effective . . . [image to the upper left from this paper]
The pressure is on to improve Fed communications given what the paper called the "current political environment in which the Federal Reserve is continually under attack."
Link http://www.mondovisione.com/media-and-resources/news/us-federal-reserve-governor-jerome-h-powell-at-the-2016-us-monetary-policy-f/

The authors were JPMorgan's Michael Feroli, Morgan Stanley's David Greenlaw, Deutsche Bank's Peter Hooper, Frederic Mishkin of Columbia University and Amir Sufi of the University of Chicago Booth School of Business, which hosted the conference attended by Fed governors Lael Brainard, Jerome Powell and others from the central bank.

Another economic slump, another communications test for Fed

NEW YORK | By Jonathan Spicer

Markets |

Fri Feb 26, 2016 10:27am EST

In this report from Reuters today a group of economists have this to say:

Time-based forward guidance should only be used in extremely unusual circumstances," five Wall Street and university economists concluded in the high-profile paper. "We believe that the current situation does not justify (it) . . .

The recommendations come as the U.S. economic recovery faces another threat from overseas.

 

The Federal Reserve, facing the delicate task of explaining how it will forge ahead with rate hikes in a stormy world economy, should avoid slipping back into the trap of tying its actions to calendar dates, top U.S. economists warned in a paper on Friday.

The research paper, presented to a roomful of Fed policymakers in New York, criticized their over-reliance on time frames in recent years when explaining what would trigger a policy tightening. Now that interest rates are up a notch, the economists argued the Fed should stress that further moves are based on very hard-to-predict economic data, and policymakers should be more unassuming in speeches and published forecasts.
Yet remnants of time-based forward guidance are still found in Fed statements, speeches and, most explicitly, in charts published every three months showing individual policymakers' expected path of rate hikes over the next few years.

"What's worrying me is that ... it looks like a commitment, it looks like a freight train," St. Louis Fed President James Bullard said on Wednesday of the so-called "dots" charts. He wants to revamp them to highlight uncertainty in the forecasts.
The charts published in December suggested the Fed would hike rates four more times in 2016.

Organization of the Federal Reserve

The 12 regional