Since the financial crisis, the Fed gave clear signals and advance warnings about shifts in monetary policy. Even the “taper tantrum” in May, 2013 was widely heralded in advance. Early warnings will soon be a thing of the past. Instead the Fed will watch the economic reports and will set policy at each meeting based on the best available information at that time. For Fed watchers, analysts and investors this means doing your own work, not just listening to the Fed chair or reading the FOMC minutes.
The FOMC statement published yesterday notes, “In determining how long to maintain this target range, the Committee will assess progress – both realized and expected – toward its objectives of maximum employment and two percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.”
In other words, policy will be set based on a review of the domestic and global economies and markets. In a last bit of forward guidance, the statement did pretty much rule out any rate increase in April, but in the same sentence the statement adds, “the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range.”
The Fed’s move away from forward guidance is another step in normalizing monetary policy. Before the financial crisis, the Fed provided general comments on the employment, inflation and the economy but rarely announced policy changes in advance – and even then the announcement was a day or two ahead, not weeks or months.
One of the post-crisis experiments in monetary policy was forward guidance and long lead time announcements to reassure markets and reduce any turmoil from policy adjustments.
The experiment was successful. Now it seems that the Fed believes the markets are sufficiently stable that the early warnings and guidance are not necessary. Forward guidance was also risky: had the Fed ever needed to change policy after it had promised not to, it would have lost credibility and trust from the markets. Eliminating forward guidance is a return to the pre-crisis normality — more work for analysts and more disagreements among forecasters.
This article was written by David Blitzer, chairman of the index committee, S&P Dow Jones Indices.
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