Policy Rules and Forward Guidance Following the COVID-19 Recession

31 Pages Posted: 14 Apr 2022 Last revised: 7 Nov 2022

See all articles by David H. Papell

David H. Papell

University of Houston - Department of Economics

Ruxandra Prodan

University of Houston - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: November 2, 2022

Abstract

The Federal Open Market Committee raised the target range for the federal funds rate by 75 basis points to between 3.75 and 4.0 percent in November 2022. This followed the September 2022 Summary of Economic Projections which projected a range between 4.25 and 4.5 percent by the end of 2022. The Committee’s actions follow the August 2020 revised Statement on Longer-Run Goals and Monetary Policy Strategy, the September 2020 Statement specifying forward guidance for when to first raise the federal funds rate, and the liftoff above the Effective Lower Bound in March 2022. We first show how to modify the rules in the Fed’s Monetary Policy Report to be consistent with the revised statement. We then show how the pattern of falling behind the curve, pivot, getting back on track and potentially overcorrecting in Fed policy during 2021 and 2022 could have been avoided by following inertial policy rules.

Keywords: Policy Rules; Forward Guidance; Monetary Policy; Federal Reserve Board; Federal Open Market Committee; Federal Funds Rate

JEL Classification: E5, E52, E58

Suggested Citation

Papell, David H. and Prodan, Ruxandra, Policy Rules and Forward Guidance Following the COVID-19 Recession (November 2, 2022). Available at SSRN: https://ssrn.com/abstract=4083466 or http://dx.doi.org/10.2139/ssrn.4083466

David H. Papell (Contact Author)

University of Houston - Department of Economics ( email )

Houston, TX 77204-5882
United States

Ruxandra Prodan

University of Houston - Department of Economics ( email )

4800 Calhoun Road
Houston, TX 77204
United States

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