Policy Rules and Forward Guidance Following the COVID-19 Recession

The Federal Open Market Committee raised the target range for the federal funds rate above the Effective Lower Bound in March 2022 for the first time since March 2020 and projected six more rate increases in 2022. The Committee’s actions follow the August 2020 revised Statement on Longer-Run Goals and Monetary Policy Strategy, the September 2021 Statement specifying forward guidance for when to first raise the federal funds rate, and the December 2020 Statement on the schedule for asset purchases. The Committee’s forward guidance, however, failed to predict liftoff from the Effective Lower Bound. We first show how the rules in the Fed’s Monetary Policy Report could be modified to be consistent with the revised statement. We then show how policy rule forward guidance using inertial rules would have provided a much more stable benchmark for liftoff from the Effective Lower Bound and projected rate increases through 2024 than the Committee’s forward guidance. As of March 2022, the federal funds rate was between 1.0 and 1.25 percent below the rate prescribed by the inertial policy rules. In order the close the gap by the end of 2022, the Committee would have to raise the federal funds rate by 1/2 percent in each of its six remaining meetings