Policy Rule Forward Guidance Following the COVID-19 Recession

Abstract

The Federal Open Market Committee’s revised Statement on Longer-Run Goals and Monetary Policy Strategy implements flexible average inflation targeting and mitigates shortfalls, rather than deviations, of employment from its maximum level. We first show how the Taylor, balanced approach, and balanced approach (shortfalls) rules in the Monetary Policy Report could be modified to be consistent with the revised statement. Federal funds rate prescriptions from the consistent rules are both closer to the liftoff from the effective lower bound in December 2015 and provide a closer fit to the actual federal funds rate than the rules currently included in the Report. We then compare prescriptions from the rules with the Committee’s forward guidance. While all of the rules prescribe liftoff from the effective lower bound before the Committee’s 2024:Q1 prescription, the prescribed liftoff with the balanced approach (consistent) rule is closest to the Committee’s. Finally, we consider longer-run scenarios. While the gap between the federal funds rate prescribed by the consistent rules and the Committee’s framework is about 2.5 percent in 2023:Q4, it is eliminated by 2026:Q2.