In 2022, as the inflation rate in the United States was rapidly increasing, an editorial in the Wall Street Journal argued: “In practice, forward guidance has tied the Fed to loose policies when inflation was accelerating, for fear that tightening too quickly would spook unprepared investors.”

a. What is forward guidance? Why has the Fed used it?

b. What does the editorial mean by “loose policies”?

c. What does the editorial mean by the Fed’s “tightening too quickly”? How does the Fed tighten monetary policy?

Why might doing so “spook” investors?