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Forward Guidance Has Outlived Its Usefulness for the Fed

Jerome Powell, chairman of the US Federal Reserve, speaks during a House Financial Services Committee hearing in Washington, D.C., U.S., on Thursday, June 23, 2022. 

Jerome Powell, chairman of the US Federal Reserve, speaks during a House Financial Services Committee hearing in Washington, D.C., U.S., on Thursday, June 23, 2022. 

Photographer: Eric Lee/Bloomberg

When central banks’ target rates were zero, their guidance about future policy was everything. Now that we’ve moved on from record-low rates, policy makers need to rethink forward guidance — or risk losing even more of their credibility.

Tomorrow, the Fed is poised to hike interest rates by three-quarters of a percent for the second month in a row. And while financial markets have already discounted this, bond markets remain as jumpy as ever despite — or should I say, because of — the Federal Reserve’s attempts to sweet talk them with forward guidance about policy. The volatility could be an indication that over-reliance on future projections is doing more harm than good, and a sign for the Fed to let rate hikes do the talking.