WSJ Fedwatcher Jon Hilsenrath is out with his latest.
He calls the FOMC decision on QE a ‘close call’ but the more interesting part is on forward guidance. Fed members widely hold a commitment to low rates but officials have been searching for ways to reinforce their pledge
Their challenge: How to justify the low interest-rate plan when their own estimates suggest an economy regaining its health.
He says the Fed officials exploring how to justify low rates far into future.The problem for the Fed is that forward guidance only works if it’s firm. If the Fed switches its forward guidance now, the implication is that it can switch it any time. If they hike the threshold for inflation to 2.5% or unemployment to 7% this month, they can lower them next month. For the market, that takes away the Fed’s credibility and forward guidance loses its power.
The other part of the problem is that the Fed’s forecasts are misaligned in 2016, something Hilsenrath explores more deeply.
Earlier, the WSJ’s Jon Hilsenrath did a live chat on spreecast (skip to 31:30 for Hilsenrath).
