Without the public’s understanding of policymaking in normal times, trying to pursue a commitment to looser-than-normal policy may send the wrong signal. For example, if the public hears that the policy rate will be lower for longer, it may interpret the message as policymakers saying that they expect the economy to be weaker for longer.
If this is the interpretation, then the forward guidance will weaken rather than strengthen current spending. Where do we go from here? My preference for dealing with forward guidance is for the FOMC to articulate a reaction function as best it can. This entails describing a systematic approach to policymaking where policy decisions are based on available information in a consistent and predictable way.