'Fed Whisperer': As the Fed Shifts to a Tightening Cycle, It's Time for 'Forward Guidance' to Play Its Role

October 27 — "Fed whisperer" Nick Timiraos wrote that Warsh's arrival coincides with the Fed's shift to a tightening cycle; from historical experience, such periods are often precisely when "forward guidance" plays a key role.

People generally believe that "forward guidance" originated in 2008-2009 and the subsequent period of ultra-loose monetary policy, because the Fed indeed relied heavily on this tool at that time when interest rates hit the "zero lower bound." But in fact, the history of forward guidance can be traced back to 1999. At that time, Fed officials wanted to withdraw the 1998 rate cuts while also avoiding repeating the 1994 mistake of catching markets off guard with insufficient communication during rate hikes. Therefore, in May 1999, the Fed first attempted to issue a policy statement after a meeting at which rates were left unchanged.

Previously, the Fed would only issue statements after meetings at which interest rates were adjusted. Six weeks later, the Fed raised rates. The minutes of the May 1999 meeting show that officials were already aware that a rate hike was highly likely and hoped to use this to guide market expectations. Officials did not want the market to misinterpret their policy intentions.