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Language after liftoff: Fed communication away from the zero lower bound

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  • Feroli, Michael
  • Greenlaw, David
  • Hooper, Peter
  • Mishkin, Frederic S.
  • Sufi, Amir

Abstract

This paper examines the Federal Reserve's communication strategy to see how well it has worked and how it can be improved. It argues that Federal Reserve communication when short-term interest rates are no longer constrained by the zero lower bound should be focused on relaying a data-based reaction function which informs market participants how interest rates will adjust as new information arrives. Instead, the Federal Reserve in recent years has relied more heavily than desired on “time-based” forward guidance, focusing on when interest rates are likely to rise rather than under what circumstances. We argue that, except under unusual circumstances, this is an imprudent strategy, as it mutes the effect of macroeconomic news on interest rates and unnecessarily places restrictions on future Federal Reserve action when new information arrives. We argue that the Federal Reserve can improve communication in the current environment by moving away from time-based forward guidance, clarifying how interest rates are likely to change given new information, and providing more information in the Summary of Economic Projections.

Suggested Citation

  • Feroli, Michael & Greenlaw, David & Hooper, Peter & Mishkin, Frederic S. & Sufi, Amir, 2017. "Language after liftoff: Fed communication away from the zero lower bound," Research in Economics, Elsevier, vol. 71(3), pages 452-490.
  • Handle: RePEc:eee:reecon:v:71:y:2017:i:3:p:452-490
    DOI: 10.1016/j.rie.2017.04.003
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Frederic S. Mishkin, 2017. "Making Discretion in Monetary Policy More Rule-Like," NBER Working Papers 24135, National Bureau of Economic Research, Inc.
    2. Bhattarai, Saroj & Chatterjee, Arpita & Park, Woong Yong, 2017. "Global Spillover Effects of US Uncertainty," Globalization Institute Working Papers 331, Federal Reserve Bank of Dallas.
    3. Julian A. Parra-Polania, 2018. "State-dependent Forward Guidance and the Problem of Inconsistent Announcements," Borradores de Economia 1035, Banco de la Republica de Colombia.
    4. Tatjana Dahlhaus & Tatevik Sekhposyan, 2018. "Monetary Policy Uncertainty: A Tale of Two Tails," Staff Working Papers 18-50, Bank of Canada.

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