Policy Rules and Forward Guidance Following the COVID-19 Recession

38 Pages Posted: 14 Apr 2022 Last revised: 7 Feb 2024

See all articles by David H. Papell

David H. Papell

University of Houston - Department of Economics

Ruxandra Prodan-Boul

Stanford University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: February 5, 2024

Abstract

The Federal Open Market Committee maintained the target range for the federal funds rate at between 5.25 and 5.5 percent in its four meetings between September 2023 and January 2024 while projecting three 25 basis point rate decreases in 2024 in the December 2023 Summary of Economic Projections. This followed rate increases totaling over 5.0 percentage points between March 2022 and July 2023 preceded by two years at the Effective Lower Bound. 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 schedule for asset purchases in December 2020. We show how to modify the rules in the Fed’s Monetary Policy Report to be consistent with the revised statement, how the pattern of falling behind the curve, pivot, and getting back on track in Fed policy during 2021 and 2022 could have been avoided by following inertial rules, and how current and projected Fed policy for 2023 – 2026 is in accord with the prescriptions from inertial 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-Boul, Ruxandra, Policy Rules and Forward Guidance Following the COVID-19 Recession (February 5, 2024). 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-Boul

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
STANFORD, CA 94305-6072
United States

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