During the unusual economic circumstances of the past six years, the FOMC has provided forward guidance to help the public better understand the anticipated future path of interest rates. The formulation of the forward guidance has changed over time, from qualitative guidance, to calendar dates, to economic thresholds, and to a blend of state-contingent and date-based guidance. Lets walk through those changes.
In December 2008, the FOMC began with qualitative guidance indicating that it anticipated that weak economic conditions were likely to warrant exceptionally low levels of the fed funds rate for some time. In March 2009, some time became extended period. In August 2011, the FOMC changed its qualitative forward guidance to a calendar date when it said that it anticipated an exceptionally low fed funds rate at least through mid-2013. That date was later extended to late 2014, and then to mid-2015.
The FOMC changed the formulation of its forward guidance from calendar dates to thresholds in December 2012. The Committee said that it anticipated that the 0-to- percent target range for the fed funds rate would be appropriate at least as long as the unemployment rate remained above 6 percent, inflation between one and two years ahead was projected to be no more than a half percentage point above the Committees 2 percent longer-run goal, and longer-term inflation expectations continued to be well anchored.
A year later, in December 2013, the FOMC blended state-contingent forward guidance with an element of calendar-date forward guidance. First, the FOMC indicated that in determining how long to maintain highly accommodative monetary policy, it would consider information in addition to the unemployment rate and PCE inflation, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The FOMC then translated this into time, saying that based on its assessment of these factors, the 0-to- percent target range for the funds rate would likely be appropriate well past the time that the unemployment rate declines below 6 percent, especially if projected inflation continues to run below the Committees 2 percent longer-run goal.
In March of this year, the thresholds were replaced with guidance that linked the path of policy to the Committees assessment of both realized and expected progress toward its dual-mandate objectives. The guidance continued to provide a time element by indicating that based on the FOMCs assessment, the funds rate target will likely remain 0-to- percent for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.
I note that the recent business cycle was not the first time the FOMC has used forward guidance. In August 2003, in the midst of elevated perceived risks of deflation, the Committee indicated that it believed policy accommodation could be maintained for a considerable period. As deflation risks eased and economic conditions changed during that cycle, the forward guidance evolved as well, eventually indicating that the FOMC would be firming policy.