WASHINGTON/TOKYO (Reuters) – Central bankers who have spent a generation researching how their words influence the economy and honing the craft of “forward guidance” are now effectively tongue-tied by a health crisis that has no clear destination yet to guide households and investors toward.
FILE PHOTO: The Federal Reserve building is set against a blue sky, amid the coronavirus disease (COVID-19) outbreak, in Washington, U.S., May 1, 2020. REUTERS/Kevin Lamarque
With everything from depression to a sharpish recovery possible over the next six months, the language from Washington to Tokyo has included broad pledges of central bank support for years to come, but little precision about what will happen next or when. The situation is counter to what a growing body of research says central banks should do in a crisis, and one the Fed in particular may move to correct in weeks ahead as its response to the pandemic approaches a new phase.
According to a crisis playbook that was taking shape at the Fed over the last year, that next phase would involve more specific statements about the scope of actions like bond purchases, how those purchases connect to efforts to keep longer-term interest rates lower, and what needs to happen to a sky-high unemployment rate before the central bank even considers slowing down.
Analysts feel that shift by the Fed may begin as soon as its meeting next month, though officials for now say the outlook is too uncertain to allow or require precise plans.
“Once we have a better idea of what the outlook looks like, what the unemployment rate will stabilize at once it peaks and then it comes back down, then we’re going to be better positioned” to offer more direction about the future path of policy, Chicago Federal Reserve President Charles E