In an op-ed article published in the Financial Times, Minneapolis Fed President Neel Kashkari said Fed should use forward guidance now to stimulate the economy. He explained that “forward guidance can also provide stimulus by signalling that overnight rates will be low in the future.” That is, Fed can “influence long-term rates by giving guidance about the future path of their short-term equivalents. The firmer the Fed’s commitment, the more influence it can have.”
Kashkari added that “forward guidance should be used now, before the federal funds rate returns to zero.” He argued that “if a central bank cuts rates to zero in response to a downturn and then announces that it plans to keep rates low, that can actually be perceived as a sign of weakness rather than strength.” Instead, “it would be better to deploy guidance now in an effort to avoid hitting zero.
Regarding the guidance, he said “at a minimum, we should commit to not raising rates again until core inflation returns to our 2 per cent target on a sustained basis.”
