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  • Writer's pictureJoe Carson

Monetary Policy At A Crossroad: "Forward Guidance" Has Two Directions For The Policy Rate Path

Monetary policy is at a crossroads in what message it wants to send. Forward guidance is the Fed's communication channel about its future policy decisions. It became an important policy tool after the financial crisis as it conveyed policymakers' commitment to a "lower-for-longer" policy path, and it proved to be instrumental in easing financial conditions during periods of economic uncertainty.

But what happens when "forward guidance" has two directions in its policy rate path? Based on the last official projections, policymakers are telegraphing or promising one more rate hike in 2023, followed by four rate cuts in 2024 and five in 2025.

Higher official rates in the short run are a bearish signal. Still, much lower official rates in the future are a bullish signal, so are policymakers being too cute by playing both sides? And, in doing so, are they undercutting their near-term intent of being restrictive to bring down consumer price inflation to its 2% target?

Studies have shown that the "signaling effect" of future policy moves gets embedded into market prices long before the announcement. If the new policy is "higher-for-longer," then the updated official rate projections must change since a nine-to-one ratio of cuts versus hikes is "nirvana" for investors and unlikely to create the financial conditions policymakers want and need to bring inflation under control.

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Forest Felvey
Forest Felvey
Sep 19, 2023

The Federal Reserve, dominated by Democrats, will not, ever, under any circumstances have a net restrictive policy which might damage Democrat prospects at national elections such as November 2024. They raised rates on Bush and Trump but zeroed them for Obama and held rates relatively, spectacularly low for Biden as inflation began to soar in 2021. Even then, they held their rate increases to a lower level than systematic policies suggested (i.e. Taylor Rule) and came up with sorta higher for longer in an anxious attempt to prevent a hard landing while leveraging higher inflation as the less POLITICALLY damaging policy. This political lens on rates is supported by today's post, but destroys the idea that most posts rely u…

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