Central banks

Fixing forward guidance

The Bank of England is doing a better job at explaining its intentions than the Federal Reserve

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Readers' comments


Mickey Mountain

All QE has done is make already rich people richer, and the poor poorer. Responsible savers and senior citizens are paying the price for the financial sector's profligacy and fraud.

c r williams

The status of today's 'forward guidance' is akin to two 6YO boys facing a urinal wall. Whether Yellen or Carney blinks first depends on each 'bladder capacity'.

Whether they like it or not, forward guidance is a 'monetary straightjacket'. So far, they have each tried unsuccessfully to lockin real-economy parameters (unemployment trends) to what is essentially a monetary market mechanism. What is the real purpose of 'forward guidance'?

In my mind, it is to indicate when inflation will be catalysed to takeoff, and to take off with a vengeance.
Both Carney and Yellen know inflation is the only way to flush certain characteristics from markets - a good dose of inflation will elevate interest rates well above the 0% lower bound, where central bankers can get back to running economies with their normal tool set.

Currently, central bankers are hamstrung, unable to use interest rates so they have turned to 'forward guidance'. They are quickly learning they lack skills with real market indicators, so why do they persist? Better to 'stick to the knitting' - stay with the financial markets where they have some skills.

Once the bladder's empty, there's not much central bankers can do.


Is it a matter of intentions, or the lack of a clear communication on intentions? Come on, there is a greater than $1 Trillion sitting as commercial bank excess reserves and a similar amount sitting as cash in the S&P 500 reserves and surplus. How would communication of intentions of this nature about possible extension of the program do to make the businesses take more to invest when they already have so much and currently cannot do more than engage in share buy-back programs?


Forgetting rational expectations and referring to the graph only, the movement of the lines started before these central bankers begin their mandate.

Your Neighbourhood Economist

For forward guidance to work, low interest rates have to be important to borrowers. But this does not seem to be the case with businesses not taking out loans despite cheap credit. So forward guidance has had little effect and the problems with using unemployment as a marker has made it an even more dubious concept. Considering that central banks rely on their reputation, it is time to give up on forward guidance. For more, see http://yourneighbourhoodeconomist.blogspot.co.uk/2013/08/same-low-intere...


The shortcoming of unemployment rate is well known. the use of it makes little sense unless it is done in conduction with the labour force participation rates.


"The first iteration of forward guidance in Britain did not fail."

Agreed. It was the markets who misread Carney's guidance. I quote:

"The first “knockout”...the MPC judges... The second is ... expectations ... The third is... judges..."

In all three knockouts, there were caveats based on his judgement, his judgement of consumer expectations and the MPC's judgement, which he no doubt influences heavily.

The markets ignored these caveats and blamed Carney. What rubbish.


s saines

Credit to The Economist for an excellent article. Brits are so steeped in cynicism as to be unable to realize that better ways of doing things exist.

But of course, Brits practise a very selective form of cynicism. Even though nothing can go right in Blighty, 'be damned that anyone else could get it right'.

It's going to be the epithet of Britannia. "We would have accepted a helping hand while we were drowning, but it was a foreigner's".

s saines in reply to s saines

My apologies to Brits, the following is written in very cogent English, so you might wish to get help understanding it.

(Mark Carney) Former Governor (2008 - 2013) of the Bank of Canada
Presented to: CFA Society Toronto
Toronto, Ontario

11 December 2012






First, allow me to address the private sector use of guidance and its impact on the financial markets.][...continues at length...]

There's lots more on the BoC website, and even Brit journalists, save remarkably few (Economist got this one right!) just don't seem to 'get it'.


That the central banks wanted to keep monetary policy loose was primary, constructing the forward guidance based on unemployment rates was just a fig leaf of objectivity and monetary neutrality, to give holders of the currencies reason to believe that the money is still sound.

Now the fig leaf has turned out to be transparent. (Even though the head of the Fed is now a woman, I refuse to discriminate on the basis of sex.)

It's only to be expected that Britain, being the less important anchor of the international monetary and economic systems, should be the one to try out the risky move of using a whole new leaf, while America pretends its leaf is still good and waits to see how the new leaf works out for Britain.

s saines in reply to EggShells


As the article rightly points out (and is rare for the UK press, even the quality business press), this is hardly untried and unique.

In Canada's case, it worked very well. Not only that, the UK is hardly an "important anchor of the international monetary and economic systems". UK banks have an outsized role in the importance of matters of regulation, but that's not what you incorrectly state.

Btw: Here's what the MPC had stated:
[...][In particular, the MPC intends not to raise Bank Rate from its current level of 0.5% at least until the Labour Force Survey headline measure of the unemployment rate has fallen to a threshold of 7%, subject to the conditions below. ][...]

"At least until" This Brit/Cdn Dual understands the language, so why is it so incredibly difficult for Brits to understand?

It is a *CONDITION* for a trigger to be enacted, not the trigger itself.

I'd suggest the entire nation take some lessons in language proficiency, and take it from one of the 'colonies' that master the language much better than Brits do.

Wot's on tele then?

Mikeylano in reply to s saines

Your comments are cringeworthy, mostly because of the obvious chip on your shoulder regarding the former colonisation of Canada. Normally this is a trait peculiar to citizens of the USA, but apparently this sickness is contagious and has permeated across international borders.

What do you think, eh?



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