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Forward Guidance in Retreat
One among the many ingredients of the verbal soup dished out by United States Federal Reserve to help the economy regain its health in the years after the 2008 crisis was FG (forward guidance), linked closely to QE (quantitative easing). But the Fed soon found itself in an expectation trap and emergent economies found themselves trapped by it. This article explains FG's short and tumultuous life and why it may be headed towards a well-deserved end.
In recent years, a new mumbo jumbo has popped up in the monetary policy statements of leading central banks. It goes by the name of “Forward Guidance” (FG). Though FG emerged as an explicit policy tool of the United States (US) Federal Reserve (Fed) only in 2012, it has become highly fashionable and many others1 are copying it.
Among neocon economists humbled by the Great Recession, there is a newfound enthusiasm to embrace it. There is an explosion of academic writing by specialists. No wonder, it has been a hot topic at the Jackson Hole conclaves. Sadly, unlike many other holy cows in monetary economics which seem indestructible like the “impossible trinity”, “Taylor’s Rule” and “inflation expectations”, etc, FG is condemned to die prematurely. Some have already written its obituary.
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