A Comparative Study of Global Central Bank Practices in Publishing Policy Rate Forecasts

The objective of this project was to compare the current forward-looking communication practice of four central banks—the Federal Reserve (U.S.), Riksbank (Sweden), Norges Bank (Norway), and Reserve Bank of New Zealand—in relation to policy rate forecasting (i.e. forward guidance), and provide recommendations based on our findings to Federal Reserve Bank of New York. In past decades many central banks have moved toward greater transparency in monetary policy, as well as in communication. Leading the trend, these four central banks began explicitly communicating the reasoning behind policy rate decisions, while also providing forward guidance on expected policy rate paths.

The Capstone team surveyed the advantages and disadvantages of forward guidance and evaluate the details of each bank’s strategies and methodologies of forward guidance communication. In analyzing forward guidance effectiveness, the students considered the following criteria: (1) managing market expectation, (2) reducing market volatility, and (3) achieving their sole mandate of price stability (inflation targeting), dual mandates for the Fed. Under the extraordinary environment induced by the financial crisis in 2008, the Fed immediately lowered the Fed Funds rate to almost zero. Even with this aggressive policy response, it, alone was not sufficient to attain the Fed’s dual mandates; therefore, the Fed started employing two unconventional policy tools: (1) the large-scale asset purchases (i.e. QE, Quantitative Easing) and (2) the communication of forward guidance. Fed’s monetary policy aims to achieve price stability and maximum employment to a large extent through its effects on public expectations about future policy. For this reason, communication strategy is more important than ever before. In the final report, the team provided recommendations drawn from our comparative study into best communications practices to make monetary policy more effective for the client.