Accessible Version

Discussion of "Language after Liftoff: Fed Communication Away from the Zero Lower Bound"

U.S. Monetary Policy Forum
February 26, 2016

Governor Jerome H. Powell
Board of Governors of the Federal Reserve System


  • This paper
    • Provides extended and insightful discussion of forward guidance
    • Makes important distinction between time-based and data-based guidance
    • Reviews forward guidance in Federal Reserve communications
  • There are limits to usefulness of distinction

Forward Guidance: Time-based (TBG)

Meeting Guidance Language
December 2008 "weak economic conditions are likely to
warrant exceptionally low levels of the
federal funds rate for some time"
March 2009 "for an extended period"
August 2011 "at least through mid-2013"
January 2012 "at least through late 2014"
September 2012 "at least through mid-2015"

Forward Guidance: Thresholds

  • December 2012 meeting-exceptionally low fed funds rate at least as long as:
    • Unemployment remains above 6-1/2 percent
    • Inflation between 1 and 2 years ahead is projected to be no greater than 2-1/2 percent
    • Longer-term inflation expectations well anchored
  • Decisive switch to data-based guidance

Large-Scale Asset Purchases

Program Date Announced Description Time
QE1 Nov 25, 2008 &
Mar 18, 2009
Agency Debt: Up to $200 billion Over several quarters
Agency MBS: Up to $1,250 billion By year-end
Longer-Term Treasuries: $300 billion Over next 6 months
QE2 Nov 3, 2010 Longer-Term Treasuries: $600 billion By end-June 2011
MEP Sep 21, 2011 &

Longer-Term Treasuries: $400 billion
(Sell equal amount of short-term
By end-June 2012
June 20, 2012   Continue MEP at current pace
through end-2012

Flow-Based Asset Purchase Program (QE3)

  • Sep 13, 2012: Purchase Agency MBS at pace of $40 billion per month (continue MEP)
  • Dec 12, 2012: Purchase longer-term Treasuries at pace of $45 billion per month after MEP ends; continue Agency MBS purchases
  • Economic conditionality:
    • Continue purchases until substantial improvement in outlook for labor market in context of price stability
    • Take appropriate account of efficacy and costs of purchases

September 2015

  • June SEP: 15 of 17 with liftoff by end-2015; markets saw 50 percent probability of a September liftoff
  • Unexpected devaluation of China's currency on August 11 caused market volatility
  • September decision was "data-driven"

Figure: Probability of 2015 Liftoff

  Probability of 2015 Liftoff
Before Oct FOMC Meeting 38.7
Oct FOMC Statement 50.2
After Oct NFP 68.0
After Nov NFP 78.0
Before Dec FOMC Meeting 90.0

*Data taken from Bloomberg WIRP function

Federal Reserve Communications since 2007

  • Summary of Economic Projections, four times each year, starting fall 2007
    • Path for appropriate monetary policy included since 2012
  • Chairman's quarterly press conferences since 2011
  • Longer-Run Goals and Monetary Policy Strategy statement since 2012
    • Formalized FOMC's inflation objective of 2 percent
    • Reaffirmed every January
  • Federal Reserve among the world's most transparent central banks

Lessons Learned and Suggested Improvements

  • "Dot plot" shows individual views on appropriate monetary policy
    • Dots not tied to macroeconomic projections
    • No information provided on identity of forecaster
    • Dots do not provide obvious means to identify Committee reaction function
    • Economic outlook can change significantly between SEPs
    • SEP submitted before meeting; statement reflects Committee consensus
  • Emphasize uncertainty surrounding projections--fan charts?
Last Update: February 26, 2016