Fed: Guidance, reaction function and rates – BNY

BNY Markets strategists John Velis and David Tam discuss new Federal Reserve (Fed) task forces and focus on the Communications group led by Mervyn King, Arminio Fraga and Peter Fisher. They highlight skepticism about forward guidance and the dots, the likely evolution of the Fed’s reaction function communication, and an outlook where the Fed stays on hold in 2026 while inflation data and energy prices keep rate expectations volatile.

Fed communications rethink and rates path

"With the leadership in place, we expect the volume of news around task force work to pick up. We will continue to be attentive to any appointments, research output, or findings that impact the Fed’s monetary policy implementation framework or understanding of the economy."

"It has been argued lately that less guidance will lead to higher rates volatility as the market is left to its own devices in forming policy expectations. With less information for it to digest, market pricing could become much more volatile."

"While we expect that the SEP won’t survive – at least in its current form – into 2027, we do note that as far as forward guidance goes, the dots were not a complete failure."

"Still, while the task force is probably, in our view, going to jettison the dot plot, it probably won’t advocate for complete silence and a return to the 1990s."

"We maintain our view that the Fed will stay on the sidelines for the rest of the year, although developments on the inflation side are both key to our view and quite uncertain."