Mixed effects of Fed forward guidance and communication obstacles

A paper on "Forward Guidance and Macroeconomic Outcomes Since the Financial Crisis" by the Chicago Fed provides a number of model-based insights into the effects of the Federal Reserve's communication strategy of using forward guidance to shape expectations:

When viewed through the lens of our full-information rational-expectations framework, FOMC forward guidance had mixed effects.

Our model indicates ... expectations of tighter-than-usual policy cost the US economy a decline in the output gap’s trough from −4 percent to −6 percent.

At its August 2011 meeting, the FOMC became more specific about its forward guidance, forecasting that the policy rate would remain at its effective lower bound “at least through mid-2013.” Thereafter, interest rate futures began to indicate that the FOMC’s policy accommodation would last substantially longer; and we estimate that this contributed to a much more rapid recovery in the output gap than would have occurred otherwise.

The paper also neatly sums up the practical communications difficulties encountered by the Fed, or actually any other central bank:

To achieve ... perfect communications, the FOMC and public must share a language rich enough to describe policy contingencies and actions, the FOMC must state its policy choices clearly in that language, and private agents must correctly decode the FOMC’s statements. Communications obstacles could have prevented any one of these three necessary conditions from being fulfilled.

First the situation in which the FOMC found itself in December 2008 was truly unprecedented, so the language needed to describe it to the public was necessarily a work in progress. Second, the FOMC speaks as a committee and not as an individual; and the diplomatic process by which any such committee makes decisions sometimes sacrifices clarity for the sake of consensus. Finally, financial market participants’ primary goal is profit, and they only concern themselves with decoding the FOMC’s “true” intentions to the extent that is serves that goal.