Abstract
In this paper we analyze the Federal Reserve’s policy and communication patterns during earlier tightening cycles to gain perspectives into the Federal Reserve’s post-financial crisis monetary policy decisions and communication practices. While each interest rate cycle is unique, as is evident in the post-financial crisis normalization episode, there are regularities that could help inform us about future policy directions. In the post-financial period, the Federal Reserve has placed a great deal of emphasis on policy communication, in particular on its forward guidance, to minimize ambiguity about the future direction of monetary policy. We examine forward guidance during the earlier interest rate cycles and identify some common elements in the Federal Reserve’s communication practices, which would be useful in interpreting the Federal Reserve’s policy actions. This leads us to conclude that it would not be uncharacteristic for the Federal Reserve to suspend its campaign of raising interest rate at this stage of the normalization process, even if inflation risk remains. This underscored the importance of judgment in policy decisions, in part due to uncertainty about the neutral rate of interest, which is a benchmark that the Federal Reserve frequently refers to. In addition, historical trends in economic variables reveal patterns that could assist in evaluating the Federal Reserve’s current and future policy decisions.
Highlights
We examine the Federal Reserve‟s policy decision making and communication since the 1990s and draw parallels with past interest rate cycles to understand the Federal Reserve‟s policy actions
The current interest rate cycle has many unique features, it shares similarities with past tightening episodes. We draw on these commonalities to shed light on the policymakers‟ analysis and how they are reflected in the Federal Open Market Committee (FOMC)‟s policy decisions, in particular at the time when the FOMC is close to ending its campaign of raising interest rates
Given the importance of judgment and subtleties in policy communication at the time when monetary policy is close to a „normal‟ level, perspectives from the past are expected to assist in understanding the current normalization process and factors that might inform us about the future policy decisions
Summary
We examine the Federal Reserve‟s policy decision making and communication since the 1990s and draw parallels with past interest rate cycles to understand the Federal Reserve‟s policy actions. This discussion draws parallels with previous interest rate cycles and illustrates that current developments are hardly unique, underscoring that economic events are never truly random.
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