Policy Rules and Forward Guidance Following the COVID-19 Recession

The Federal Open Market Committee raised the target range for the federal funds rate to between 5.25 and 5.5 percent in its July 2023 meeting. This followed rate increases totaling 5.0 percentage points between March 2022 and June 2023 preceded by two years at the Effective Lower Bound. The Committee’s actions follow the August 2020 revised Statement on Longer-Run Goals and Monetary Policy Strategy, the September 2020 Statement specifying forward guidance for when to first raise the federal funds rate, and the schedule for asset purchases in December 2020. We first show how to modify the rules in the Fed’s Monetary Policy Report to be consistent with the revised statement. We then show how the pattern of falling behind the curve, pivot, and getting back on track in Fed policy during 2021 and 2022 could have been avoided by following inertial policy rules. Finally, we show that current and projected Fed policy for 2023 – 2025 is in accord with the prescriptions from inertial policy rules.