In the past several months we have used forward guidance less than we did in the aftermath of the financial crisis when we named calendar dates or gave explicit economic conditions that we would need to see prevailing in the economy before considering an increase in the federal funds rate…

We're not relying very much on forward guidance. We do publish every three months participants' projections for the paths of the federal funds rate that they believe will be appropriate in light of their expectations about the performance of the economy and sometimes those paths which participants discuss in their remarks are thought to constitute forward guidance about policy.

I do believe those projections are helpful to the public in understanding the path of the economy that participants think is likely and how if those conditions prevail they would see monetary policy as evolving, but as I always emphasize on every occasion including in my prepared remarks those paths, while I think they're helpful, are not a preset plan and not in any way a commitment. We are constantly trying to evaluate in light of incoming information the outlook in risks and you see those paths change over time as we update our evaluation of the economic outlook and I think that's a critical part of monetary policy.

In my remarks today, I will explain why the Committee anticipates that only gradual increases in the federal funds rate are likely to be warranted in coming years, emphasizing that this guidance should be understood as a forecast for the trajectory of policy rates that the Committee anticipates will prove to be appropriate to achieve its objectives, conditional on the outlook for real economic activity and inflation. Importantly, this forecast is not a plan set in stone that will be carried out regardless of economic developments.

The Federal Open Market Committee kept interest rates unchanged last week and halved projections for how many times it would hike this year from four times in December after volatility in financial markets and weakening global growth clouded the U.S. economic outlook. Bullard argued that the forecasts, also referred to as the dot plot, contribute to uncertainty in financial markets.

“You really saw that over the first part of this year,” Bullard said, adding that he’s getting “increasingly concerned” about giving forward guidance through those projections. “I’ve even thought about dropping out unilaterally from the whole exercise.”
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“I am not revealing my dot,” Bullard said. “I want to get out of the game of how many rate increases this year.”

I am not revealing my dot. I want to get out of the game of how many rate increases this year.

Any discussion about the costs and benefits of forward guidance must take place in the context of the situation in which it is being used. This brings me to my first case study, the Fed’s use of explicit time-based guidance starting on August 9, 2011. Despite extraordinary monetary stimulus—over 2½ years of near-zero short-term interest rates and QE1 and QE2—the unemployment rate had come down only 1 percentage point from its recession peak, to 9 percent, and the economic recovery remained tepid. Given the weakness in the economy, the FOMC repeatedly stated that it intended to keep rates exceptionally low “for an extended period.” Nonetheless, public expectations were glued to the idea that the Fed would start to raise rates in about a year.

It was against that backdrop that the FOMC decided to take dramatic action to shift public expectations using time-based forward guidance. The August 2011 FOMC statement said “The Committee currently anticipates that 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 mid-2013.” Three comments are in order. First, this statement, as well as subsequent FOMC statements that used forward guidance, clearly put the economic outlook front and center as the determinant of policy. The outlook defines the guidance. Second, it was the lower bound that tied the hands of policymakers, not the introduction of date-based guidance. Third, this action was taken after weighing the concerns around the costs of time-based guidance discussed in Feroli et al. (2016); the conclusion then was that the benefits from stimulating the economy outweighed the potential cost.

The evidence bears out this judgment. The issuance of the statement dramatically shifted public expectations of future Fed policy. This is seen in private economists’ forecasts of the length of time until the Fed would raise rates, which jumped following the statement. Compared to the gentle taps of the hammer of previous FOMC verbal guidance that appeared to have little effect on expectations, the time-based guidance was like a sledgehammer.

A data-driven Committee, making decisions meeting by meeting, is likely to surprise markets from time to time. The authors join many others in criticizing the "measured pace" period of 2004 through 2006, during which the Committee increased rates by 25 basis points at 17 consecutive FOMC meetings. A common criticism has been that this high level of predictability made investors complacent, encouraging a buildup of leverage and helping set the stage for the Global Financial Crisis. That criticism may well overstate the importance of the Committee's communications; nonetheless, a number of FOMC participants have said that the Committee intends to be "data driven" and not fall into an excessively predictable, data-insensitive path. Lower predictability implies more surprises.

Former Chairman Bernanke recounts in his recent book that he saw [open-ended, data-driven] QE3 as akin to Mario Draghi's statement that the European Central Bank would do "whatever it takes." He also notes that FOMC participants held divergent views on the potential costs and benefits of the program. Minutes of the relevant meetings described the complex discussions and differing views. Contemporaneous reports by Wall Street analysts show frustration and confusion about the Committee's intentions.
When various FOMC communications suggested that the time to begin reducing purchases was nearing, long-term rates rose sharply--the so-called taper tantrum. The contention of this paper is that time-based guidance was responsible. But as the paper acknowledges, the open-ended, data-contingent nature of the QE3 program created a strong sense that the Fed was "all in" and that the purchases might go on for a long time. That powerful commitment "would set things up for some fireworks" when the time came to provide more precise guidance as to the timing of tapering, whether that was done through time- or data-based guidance

"Markets got the idea that, well, once the Fed gets going there is no stopping us, like a train leaving the station," Mr. Bullard said Thursday in an appearance on CNBC. Of the tightening cycle of 2004-2006, Mr. Bullard said, "That doesn't sound data dependent."
So when the Fed moved rates 25 basis points higher in December, while insisting more hikes would be data dependent, "markets didn't see 25 basis points, which should have been a small move and should not have been important," Mr. Bullard said. "Instead they saw 125 basis points pulling up."
The Fed, beginning in December, based on its actions in 2004-2006, "didn't have credibility on the idea that we're data dependent," he said. Mr. Bullard said he now believes the Fed should get away from predicting how many rate increases might come in a given year.
“I worry that we somehow signal that we are on a freight train path.”

I don’t view this “data–dependent” approach to policymaking as something new. Instead, I view it as a step on the journey back from extraordinary to more ordinary monetary policymaking. You will recall that one of the policy tools the FOMC used during the recession and early part of the recovery was explicit forward guidance. That guidance changed over time:
• It began as qualitative guidance offered in December 2008 when the FOMC indicated that weak economic conditions were likely to warrant exceptionally low levels of the fed funds rate for “some time.”
• This changed to calendar–date guidance in August 2011 when the FOMC said that it anticipated an exceptionally low fed funds rate at least through mid–2013.
• Guidance based on economic thresholds was offered in December 2012 when the Committee said that it anticipated that the 0–to–1⁄4 percent target range for the fed funds rate would be appropriate at least as long as the unemployment rate remained above 6 1⁄2 percent, inflation between one and two years ahead was projected to be no more than a half percentage point above the Committee’s 2 percent longer–run goal, and longer–term inflation expectations continued to be well anchored.
• A year later, in December 2013, the FOMC blended state-contingent forward guidance with an element of calendar-date forward guidance, indicating the information it would consider in determining how long to maintain highly accommodative monetary policy as well as an assessment that it would likely be “well past the time that the unemployment rate declines below 6 1⁄2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer–run goal.”
In March 2014, the FOMC abandoned quantitative thresholds and moved toward the type of forward guidance we have today, which links the path of policy to the Committee’s assessment of both realized and expected progress toward its dual–mandate objectives. The guidance continued to provide a time element by indicating it was likely that liftoff would not occur for “a considerable time after the asset purchase program ends.”
After the purchase program ended, using it as a benchmark for guidance became less salient. In January 2015, the FOMC replaced this benchmark and simply said it judged it could be patient in beginning to normalize policy. In March, the FOMC fine–tuned this by stating the two criteria it would use to assess when it would be appropriate to make the first fed funds rate increase. These criteria were further improvement in the labor market and reasonable confidence that inflation would move back to its 2 percent objective over the medium term. Since December’s liftoff, the Committee has continued to indicate that the path of policy will depend on progress toward our goals, and that while the actual path policy takes will depend on the economic outlook as informed by incoming data, the Committee’s current assessment is that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.
This evolution in the FOMC’s forward rate guidance represents a return to more normal times. While explicit forward guidance was used as a policy tool during the recession and early in the recovery, in more normal times, away from the zero lower bound, I believe forward guidance should be viewed more as a communications device.

In his remarks, Bullard said communicating the policy path this way "could be viewed as an inadvertent calendar-based commitment to increase rates."

“Maybe we should get away from how many hikes we should do in a year,” he told reporters after his presentation. “You would like to move on good news about the U.S. economy, reasonably good economic growth, further improvement in labor market, confidence that inflation is coming back to path.”

[W]e expect that the normalization of monetary policy will be quite gradual. But, there is no commitment here. The flow of the data—broadly defined―will drive our actions as it influences our assessment of the economic outlook and our view of the stance of monetary policy best suited to achieve our dual mandate objectives of maximum sustainable employment and price stability.

What we can do is to do our very best to communicate clearly about our policy, and our expectations, to avoid any type of needless misunderstanding of our policy that could create volatility in the market and potential spillovers as well to emerging markets. And I have been trying to do that now for some time. I've been doing my best to make good on that pledge.

I think our experience suggests that it's hard to have great confidence in predicting what the market reaction will be to Fed decisions, and there have been surprises in the past. I don't think the committee anticipated that its decision would cause the "taper tantrum."

And all I can say is that uncertainty in the markets at this point about long-term rates doesn't appear to be unusually high. And we can only do what is in our power to attempt to minimize needless volatility that could have repercussions for other countries or for financial stability more generally, and that is to attempt to communicate as clearly as we can about our policy decisions, what they will depend on and what we're -- what we're looking at.

I'm in favor of making sure that June is on the table as a viable option. In my view, and i think the chair explained this quite well in her testimony, taking patient out does not necessarily mean that a rate rise will necessarily come in June. Right? What it means is that June becomes a viable option that we are going to start looking at any meeting, right, we are going to go into the meeting with that being a possibility. Right now, patient is defined as no rate rise for two meetings.
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So I can't tell you that because we are going to be assessing the data as it comes in, in the spring as we get towards the summer, right? We are data dependent in the sense of we look at incoming economic data, see how it effects our outlook, and then set policy based on that. So I can't tell you today what i will or will not support in June because i want to see the data that comes in over that time. I can tell you that my outlook is that the economy actually is picking up momentum. We've had some very strong labor market reports over the last, you know, six months even. Inflation's below our goal, but the report this morning about what was going in the CPI wasn't a surprise, total CPI being low, but core CPI stabilizing. So my forecast is for inflation to go back up to 2 % by the end of next year.

We are coming at this from a position of strength, Mr. Williams said. As we collect more data through this spring, as we get to June or later, I think in my own view well be coming closer to saying there are a constellation of factors in place to make a call on rate increases, he said.

I dont see any reason at all that we should raise rates before June. Thats out, he said. Maybe in June it would be the time to contemplate raising rates. Maybe well want to wait longer, but at least it will be an option to decide on, he said. The Fed has a scheduled policy meeting June 16-17.

Mr. Williams said he would like the Fed to drop its commitment to be patient in deciding when to raise rates because it limits the central banks options on when to move. You would want to remove the patient language only to have the ability to make those data-dependent decisions later in the year, he said.
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Mr. Williamss confidence about the monetary policy outlook is rooted in what he sees as labor market strength. He believes weak inflation, which has undershot the central banks 2% target for more than two years, will rise to its desired level by the end of 2016.

He also said falling short on the inflation target wont necessarily stay the Feds hand on rate increases. Because Fed rate actions have to take account of their effect over the long run, its very likely we would start raising interest rates even with inflation below 2%, he said.

Mr. Williams said it is likely that the Fed will see a hot labor market that should in turn produce the wage pressures that will drive inflation back up to desired levels. He said much of the weakness seen now in price pressures is due to the sharp drop in oil prices, which he said isnt likely to last.

The cosmological constant is that if you heat up the labor market, get the unemployment rate down to 5% or below, thats going to create pressures in the labor market causing wages to rise, he said.

Mr. Williams said there is a disconnect between Fed officials and markets expectations for the path of short-term rates. He said he hopes that can be bridged by effective communication explaining central bank policy choices.

I have no desire to raise rates just to raise rates. Im not worried about financial stability, personally. Im not worried about risks of low interest rates on their own. I am focused on the very pedestrian issue of achieving the Feds employment and inflation goals, and will make policy with those factors in mind, Mr. Williams said.

He said that when the Fed does raise rates, he would prefer a gradual path, but he doesnt expect it to replay the series of steady, small rate increases seen a decade ago. He said he could see the Fed taking whatever action is needed at a given meeting, rather than putting rates on a steady upward path.

WILLIAMS: And I have been in the Fed 20 years. I remember, you know, all the different measured phase (ph), considerable period, and considerable time.

BARTIROMO: Right, right, right.

WILLIAMS: So, we've always had this problem. My hope is, is that we'll be able to move away from the market looking for the Fed to tell them what we are going to do. And basically describe our policy strategy, our goals, how we view the economy, and let market participants come to their own judgments -- basically, when we're going to move, how much we're going to move by, and over what period.

So, you know, we have two get out of this being so explicit with our forward guidance, telling everybody what we're planning to do. That was really important in 2011, 2013, 2014, when we had the zero interest rates. It was a really powerful tool I think that helps us provide a combination, help us support the recovery. Now that we are getting back to the more normal period, I think we have to get away from being so explicit in what we're planning in doing, and let to be just data-dependent and let people try to understand that.