Short term interest rates have been near zero for a while, so the Fed can’t really lower them any further. Monetary policy isn’t pushing up inflation, as many had feared it would. And while the Fed is still employing the bond-buying program formerly known as Quantitative Easing to push down interest rates on bonds and assets, it’s beginning to ramp that down.
In other words, the Fed has now employed all of its tools it usually uses to influence interest rates. All it’s got left? Words. Specifically, something called “Forward Guidance,” which is really just telling the American people what it plans to do in future. That may sound obvious, but it’s a real departure from the opaque world that the Fed used to inhabit.
Also, in referencing a chart of the guidance made with dots, Yellen said we “should not look at the dot plot as the primary way in which the Committee is speaking to the public at large.”
“These dots are going to move up or down over time.”
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