Jai Kedia
I recently had a letter to the editor published by the Wall Street Journal in support of Donald Luskin’s op-ed calling for an end to forward guidance—the practice by which central bankers try to use their public statements and forecasts to guide markets and consumers.
In the letter, I augment Luskin’s arguments with two recent and concrete examples of the failures of forward guidance.
Last September, rising inflation warranted holding the target range or a small increase. The Fed’s forward guidance communications had already signaled a rate cut and, not wanting to spook markets, the FOMC followed through with the cut despite prevailing data.
This March’s Summary of Economic Projections offered another example. No policymaker forecast a hike for the year despite inflation well above target, while private markets had already begun pricing one in. The committee caught up in June, months late, with no real change in the risks from tariffs, war, or fiscal spending. All forward guidance achieved was a muddying of the prevailing economic conditions.
The Fed should scrap forward guidance and publish a clear monetary policy rule: A formula tying the rate target to economic data. That is the best form of forward guidance.
