“The Fed's Megaphone”: The Fed's Shift to a Tightening Cycle Is Exactly When “Forward Guidance” Comes Into Play

According to TechFlow, on October 27, Nick Timiraos, known as “the Fed's megaphone,” wrote that Warsh's appointment coincides with the Fed's shift to a tightening cycle; historical experience suggests that such periods are often when “forward guidance” plays a key role. Forward guidance is generally thought to have originated during 2008-2009 and the subsequent ultra-loose monetary policy period, because the Fed relied heavily on this tool when rates hit the “zero lower bound.” In fact, the history of forward guidance can be traced back to 1999.

At the time, Fed officials wanted to reverse the 1998 rate cuts while avoiding a repeat of the 1994 rate hike, when inadequate communication caught markets off guard. As a result, in May 1999, the Fed tried for the first time to issue a policy statement after a meeting that held rates unchanged. Previously, the Fed only issued statements after meetings that adjusted rates. Six weeks later, the Fed raised rates. Minutes from the May 1999 meeting showed that officials were already aware that a rate hike was highly likely and hoped to use this to guide market expectations. Officials did not want the market to misread their policy intentions. (Jin10)

Source: TechFlow