Fed Forward Guidance: A Look Back

        By Pedro Nicolaci da Costa
        After years of promising interest rates will stay low for a while, the Federal Reserve is likely to become a bit less predictable.
        Since late 2008, the Fed has used a variety of verbal expressions--a policy approach known as " forward guidance"-- to assure investors its benchmark short-term rate would probably stay near zero for some time.
        Never known for colorful language, the Fed used vague terms like "patient," "considerable time" and "extended period," to describe how long it would likely hold rates very low. On some occasions officials gave more precise dates and economic markers to influence expectations.
        The hope was such pledges would cause the markets to hold long-term rates lower for longer, rather than nudge them higher in anticipation of a Fed rate increase.
        Now, as Fed officials discuss raising rates this year, they are preparing to drop such assurances. Instead, they would like to shift to terminology that gives them, in Fed Chairwoman Janet Yellen's words, the ability to mull rate rises on a " meeting-by-meeting basis."
        The Fed is expected on Wednesday to drop its promise to be "patient" in deciding when to start raising rates. Ms Yellen has said the term meant the central bank would not raise rates at the following two meetings. Scrapping it would open the door to a rate increase at the June policy meeting, which several Fed officials want to consider.
        Some economists think the Fed might say instead--as Ms. Yellen did in recent congressional testimony--the central bank won't raise rates until it is " reasonably confident" that inflation will move back toward its 2% target--an amorphous concept that gives the Fed more wiggle room.
        Here is a look back at the Fed's forward guidance in its various iterations since late 2008, as expressed in the Federal Open Market Committee's postmeeting statements.
        Dec. 16, 2008: The Fed cuts its benchmark short-term interest rate, the federal funds rate, to zero for the first time in the central bank's 100-year history, saying it expects that "weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time." The commitment is repeated in January 2009.
        March 18, 2009: The Fed starts saying it expects to hold the fed funds rate near zero " for an extended period." Officials never said how long an "extended period" might be.
        Sept. 21, 2011: The Fed drops "extended period," opting for specific calendar guidance. It expects to hold rates low "at least through mid-2013."
        Jan. 25, 2012: The fed funds rate is likely to stay near zero "at least through late 2014."
        Sept. 13, 2012: Officials now expect to hold the fund rate near zero "at least through mid-2015." The Fed also says it expects to hold the rate very low "for a considerable time after the economic recovery strengthens." They repeat this language at the October meeting.
        Dec. 12, 2012: They keep the "considerable time" phrase, but link it to the duration of their third bond-buying program. They say they expect to hold the fed funds rate near zero for "a considerable time after the asset purchase program ends and the economic recovery strengthens."
        Since many officials are unhappy with the calendar-based guidance, they also stop saying they will hold rates super low through some specified date. Instead, they set numeric thresholds, saying they'll keep rates low "at least as long as the unemployment rate remains above 6-1/2%, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2% longer-run goal, and longer-term inflation expectations continue to be well anchored."
        March 20, 2014: The thresholds work for some time, but then officials run into a predicament--the jobless rate is falling much faster than they had forecast, bringing unemployment closer to 6.5% more quickly than anticipated. By February, ahead of the Fed's March 2014 meeting, the rate has fallen to 6.7%. So the Fed drops the thresholds and goes back to more qualitative guidance. In deciding how long to hold rates near zero, it "will assess progress--both realized and expected--toward its objectives of maximum employment and 2% inflation."
        The Fed repeats it will wait to raise rates for "a considerable time" after the bond-buying ends. Ms. Yellen says at her
        first press conference as chairwoman that "considerable time" means roughly six months.
        Dec. 17, 2014: The Fed ends its bond-buying program in October, and in December replaces the "considerable time" language with a vow to be "patient" in raising interest rates. The Fed "can be patient in beginning to normalize the stance of monetary policy." The phrase is repeated in the January statement.
        Related reading:
        Fed Likely to Remove 'Patient' Barrier for Rate Increase as Soon as June
        What Will Make Fed's Yellen 'Reasonably Confident' in Inflation Rebound?
        Fed Forward Guidance Works, Sometimes Better Than Others: IMF
        Fedspeak Cheatsheet: What Are Fed Policy Makers Saying?
        (END) Dow Jones Newswires

        March 17, 2015 06:32 ET (10:32 GMT)

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