(March 18, 2016) Financial markets reacted to the outcome of the Federal Open Market Committee meeting on Wednesday, March 16, as if what the Fed had revealed was highly dovish, that is, diminishing expectations regarding future interest rates.
The Federal Reserve and the Bank of England have each recently backed away from “forward guidance” that they had given earlier in the form of thresholds for the unemployment rate. As a result of their changes in emphasis, they are both being accused of confusing the financial markets.
The Fed at the end of 2012 had said that it planned on keeping monetary policy easy at least until the unemployment rate had fallen below 6 ½ %. The Bank of England in mid-2013 had made a similar statement, with a threshold figure for UK unemployment of 7%.
The time is right for the world’s major central banks to reconsider the framework they use in conducting monetary policy. The US Federal Reserve and the European Central Bank are grappling with sustained economic weakness, despite years of low interest rates. In Japan, Shinzō Abe of the Liberal Democratic Party’s (LDP) was elected prime minister December 16 on a platform of switching to a new, more expansionary, monetary policy. Mark Carney, the incoming governor of the Bank of England, has made clear that he is open to new thinking.