By Steven K. Beckner


There is widespread dissatisfaction with the use of a calendar date
to signal how long the Fed will keep the federal funds rate near zero,
but that form of “forward guidance” seems likely to remain in use for
some time to come.

While there is broad concurrence about the need to improve monetary
policy communication on the FOMC, views diverge when it comes to
deciding exactly how to proceed.

Until agreement can be reached on some new approach to conveying
when the FOMC will consider raising the funds rate and/or shrinking the
Fed balance sheet, the default position is that it’s better to stay with
the calendar date, however imperfect it may be.

The FOMC has used “forward guidance” as far back as 2003, when it
said it expected to keep the funds rate at 1% “for a considerable

But it first began giving explicit and specific forward guidance on
the path of the funds rate on Aug. 9, 2011, when it said “economic
conditions — including low rates of resource utilization and a subdued
outlook for inflation over the medium run — are likely to warrant
exceptionally low levels for the federal funds rate at least through

On Jan. 25, 2012, the FOMC moved the projected date for the
earliest rate hikes to at least late 2014. Then on Sept. 13, the
“lift-off” date for the funds rate was moved to at least mid-2015.

As this record suggests, one knock on the use of a calendar date is
that the FOMC has to continually reassess and change it.

Fed policymakers ranging from “doves” like Evans to “hawks” like
Plosser have argued it would be far better for the FOMC to lay out a set
of economic conditions that would cause the Committee to at least
consider monetary tightening.

Unfortunately, that’s about as far as the consensus reaches.

Minutes of the Oct. 23-24 meeting say, “Participants generally
favored the use of economic variables, in place of or in conjunction
with a calendar date, in the Committee’s forward guidance, but they
offered different views on whether quantitative or qualitative
thresholds would be most effective.”

The “qualitative” versus “quantitative” debates rages on, and some
policyamkers are torn between the two.

There is much sentiment in favor of announcing specific
unemployment and inflation “thresholds” at which the FOMC would at least
start to consider changing policy.

At the Oct. 23-24 FOMC meeting, the minutes say, “Many participants
were of the view that adopting quantitative thresholds could, under the
right conditions, help the Committee more clearly communicate its
thinking about how the likely timing of an eventual increase in the
federal funds rate would shift in response to unanticipated changes in
economic conditions and the outlook.”

“Accordingly, thresholds could increase the probability that market
reactions to economic developments would move longer-term interest rates
in a manner consistent with the Committee’s view regarding the likely
future path of short-term rates,” the minutes add.

Numerical thresholds have their vocal advocates, who argue that
“qualitative” rhetoric would be too vague.

More than a year ago, Evans proposed that the funds rate be kept
near zero so long as unemployment was 7% or higher and inflation 3% or
lower. A couple of days ago he revised that scheme, calling it “too
conservative.” He now proposes that the Fed should stay at the funds
rate floor as long as unemployment is 6 1/2% or higher and inflation is
2 1/2% or lower.

Evans, who will be an FOMC voter next years, stressed his inflation
threshold is a forecast, not a current reading. “A threshold based on
the forecast for inflation would avoid triggering a policy reaction in
response to transitory movements in prices — say, to some temporary
swing in energy prices,” he explained. “It would also take into account
everything we are seeing in the economy in terms of cost pressures and
inflationary expectations — factors that influence the inflation
outlook before they show up in actual inflation data.”

Minneapolis Fed President Kocherlakota has suggested keeping the
funds rate near zero so long as unemployment is higher than 5 1/2%,
provided inflation doesn’t exceed 2 1/4%.

Yellen hasn’t offered a specific formula, but said two weeks ago
she is “strongly supportive” of such ideas, because thresholds “would
enable the public to immediately adjust its expectations concerning the
timing of liftoff in response to new information affecting the economic

“This market response would serve as a kind of automatic stabilizer
for the economy,” she said. “Information suggesting a weaker outlook
would automatically induce market participants to push out the
anticipated date of tightening and vice versa.”

What’s more, Yellen said “the use of inflation and unemployment
thresholds would help the public understand whether a shift in the
calendar date, assuming that one is still included in the statement,
reflects a change in the Committee’s economic outlook or, alternatively,
a change in its view concerning the appropriate degree of

“Since monetary policy works in large part through the public’s
perceptions of the FOMC’s systematic behavior, this distinction is
critical,” she added.

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