On 16 September, the Federal Reserve surprised many observers by releasing new forward guidance on interest rates earlier than anticipated. This follows another earlier-than-expected release of its framework review conclusions during the Jackson Hole symposium last month.

However, the lack of market reaction suggests that many investors are not convinced that the Fed’s new guidance represents any material shift in policy. Indeed, we wonder if the Fed leadership is using surprises and emphatic language to try to compensate for a Federal Open Market Committee (FOMC) that may not be fully on board with a more significant regime shift.

Outcome-based guidance morphs into forecast-based guidance

As expected, Fed officials forecast that the policy rate is likely to be on hold through 2023. With their forecasts for above-consensus U.S. growth but core PCE inflation still at just 2% in 2023 (PCE, or personal consumption expenditures, is the Fed’s preferred inflation measure), it’s no surprise that only four Fed officials expect interest rate hikes over the next three years. Indeed, PIMCO forecasts U.S. inflation will take several years to return to target given elevated unemployment and slack in the economy.

The surprise was the introduction of interest rate guidance into the September FOMC statement. The Fed states it will now be on hold until the economy is at maximum employment and “inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time”(our emphasis).