What is forward guidance, and how does the Fed use it?
The Fed has continued to rely on forward guidance during the economic lockdown triggered by the virus outbreak
Federal Reserve Chairman Jerome Powell, at the beginning of May, acknowledged the central bank may need to deploy additional measures to fight the coronavirus-induced downturn -- and said policymakers would rely on their "tried and true" toolkit to do so.
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"We think we have a good toolkit, and that’s the one we’ll be using," Powell said, adding: "We do feel that our tools work. Forward guidance and asset purchasing work."
Forward guidance is a fairly straightforward tool the Fed relies on to help the economy. Essentially, the central bankers tell the public about the likely course of monetary policy, including whether or not they intend to cut or raise interest rates.
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When central bankers provide the public with forward guidance, they can use it to make informed decisions about spending and investments.
The Fed began using forward guidance in the early 2000s; before a rate-setting meeting in June 2004 -- at which policymakers voted to increase interest rates -- the Federal Open Market Committee signaled that it was going to tighten monetary policy.
It relied on the tool again during the 2008 financial crisis, when it slashed interest rates to near-zero and then used forward guidance to let the public know the likely course of monetary policy in the recession's aftermath.
For instance, after a meeting in December 2008, the FOMC wrote that weak economic conditions were "likely to warrant exceptionally low levels of the federal funds rate for some time" -- letting the public know that interest rate hikes weren't coming anytime soon.
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The Fed has continued to rely on forward guidance during the economic lockdown triggered by the virus outbreak.
Fed officials left interest rates near-zero during their April meeting, and in their post-meeting statement, reiterated previous guidance that the benchmark federal fund rate will remain at a range between 0 percent and 0.25 percent "until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”
Some members also indicated they'd like to designate a specific date before rates could be raised, according to recent meeting minutes.