Informing the public about the Federal Reserve
How does forward guidance about the Federal Reserve's target for the federal funds rate support the economic recovery?
Clear communication is always important in central banking, and is especially important in the present circumstances when the economy requires further policy stimulus but the traditional tool of monetary policy, the target for the federal funds rate, is already effectively as low as it can go. (Since December 2008, the Federal Reserve's target for the federal funds rate has been between 0 and 1/4 percent.) Through "forward guidance," the Federal Open Market Committee provides an indication to households, businesses, and investors about the stance of monetary policy expected to prevail in the future. By providing information about how long the Committee expects to keep the target for the federal funds rate exceptionally low, the forward guidance language can put downward pressure on longer-term interest rates and thereby lower the cost of credit for households and businesses, and also help improve broader financial conditions.
At their March 2014 meeting, Federal Reserve policymakers indicated that, in determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, they will assess progress--both realized and expected--toward their objectives of maximum employment and 2 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 developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.