What use is Forward Guidance that keeps being wrong?

Last night brought one of the most anticipated U-Turns in monetary policy as the US Federal Reserve announced this.

In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 2 to 2-1/4 percent.

Thus we saw the expected interest-rate cut of 0.25% and there was also an accelerated end to the era of QT ( Quantitative Tightening).

The Committee will conclude the reduction of its aggregate securities holdings in the System Open Market Account in August, two months earlier than previously indicated.

Whilst we are on the subject let us use the words of the Clash as we may not see QT again and we certainly will not be seeing it for a while.

Yeah, wave bye, bye

At this point on a superficial level this looks like a success for Forward Guidance as the Treasury Note ten-year yield around the 2.04% level where it had started. But there are two big catches with this. The first revolves around when economic agents were making plans for 2019 because back then the Federal Reserve was talking of “normalisation” which involved 4 then 3 then 2 interest-rate increases in 2019. Now we have a cut and as I will discuss later am expecting another.

Last Night

The response of observers to the effort to provide new Forward Guidance by Chair Jerome Powell was to sing  along with The Strokes.

And say, people, they don’t understand
Your girlfriends, they can’t understand
Your grandsons, they won’t understand
On top of this, I ain’t ever gonna understand

Here via CNBC was his opening effort.

Looking at the history of the Fed, Powell cautioned against assuming that this week’s cut is the beginning of the cycles that happened in the past.

“That refers back to other times when the FOMC has cut rates in the middle of a cycle and I’m contrasting it there with the beginning of a lengthy cutting cycle,” he said. “That is not what we’re seeing now, that’s not our perspective now.”

So it was “one and done” was it? I doubt anyone including Chair Powell actually believed that especially if they looked at the knee-jerk response which was for a stronger US Dollar. Indeed in the same press conference he seemed to correct himself.

“Let me be clear: What I said was it’s not the beginning of a long series of rate cuts,” Powell said. “I didn’t say it’s just one or anything like that. ( CNBC )

He also managed to talk about interest-rate rises for a while as things got even more out of control. So you could have pretty much any view you like as we had guidance towards no more cuts,more cuts and perhaps rises too. That is quite a fail when the scale of your operations which already are the elephant in the room are about to get larger.

Oh and did I mention an elephant in the room?

What the Market wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle which would keep pace with China, The European Union and other countries around the world……..As usual, Powell let us down, but at least he is ending quantitative tightening, which shouldn’t have started in the first place – no inflation. We are winning anyway, but I am certainly not getting much help from the Federal Reserve!

That was of course President Trump who may tweet excitedly but so far has given us better forward guidance than the Fed. Who will bet against the US Federal Reserve making another interest-rate cut this year?

European Central Bank

The ECB has been on a not dissimilar road to the Federal Reserve. I am sure the “ECB Watchers” would like us to forget that they were predicting an increase in the Deposit Rate this year as a result of their inside knowledge. They of course ended up scuttling away into the dark but the ECB kept this up until the 18th of June.

We now expect them to remain at their present levels at least through the first half of 2020, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.

The informal hint that a change was on it way provided by Mario Draghi on the 18th of June became formal a week ago.

We expect them to remain at their present or lower levels at least through the first half of 2020, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to our aim over the medium term.

So not as grand a scale as the Federal Reserve but up has become the new down here too, or to be more precise is on its way in September. Assuming of course this guidance is correct.

Bank of England

Governor Carney has been even slower on the uptake than his international colleagues. As 2019 has progressed and we have seen interest-rate cuts proliferate he has cut an increasingly isolated figure.

The Committee continues to judge that, were the economy to develop broadly in line with its May Inflation Report projections that included an assumption of a smooth Brexit, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon.

It is revealing that the sentence needs to be so long but the message is that the plan is to tighten monetary policy and apparently ignore the rush in the other direction. More realistically of course the reality is that we should be prepared for the return of the Unreliable Boyfriend as he has a track record of cutting interest-rates after promising rises.

Also this is revealing.

Mark Carney, Governor of the Bank of England says “there will be great fortunes made” for companies preparing for and tackling climate change. ( Channel 4 News)

These days he seems to spend much of his time discussing climate change. If we skip the issue of him having both no mandate and indeed no qualifications in this area we find that he is deflecting us from his troubles with monetary policy. From his personal point of view discussing it is also part of his application for the IMF job.

Meanwhile as we move through the “Super Thursday” procedure he constructed I hope the media will concentrate on how he is forecasting interest-rate increases in the current economic environment.


It is more than six years ago that Michael Woodford told us this.

Greater clarity within the policy committee itself about the way in which policy is expected to be conducted in the future is likely to lead to more coherent policy decisions, and greater clarity on the part of the public as to how policy will be conducted is likely to improve the degree to which the central bank can count on achieving the effects that it intends through its policy.

As you can see the initial point failed last night as Chair Powell was pretty incoherent. Whilst Mario Draghi of the ECB is a much more professional operator he too struggled at his last press conference on the subject of the inflation target. It is about to be Governor Carney’s turn to face the music and he is usually the most incoherent. This means that they cannot give the public “greater clarity” and in fact have misled them which means they are undermining their own policies.

Of course there is also the Riksbank of Sweden to make the others feel better.

Me on The Investing Channel





13 thoughts on “What use is Forward Guidance that keeps being wrong?

  1. And so you have central banks, confusing, misleading and outright lying to markets and yet they they fawn and hang on every word of the contradicting gibberish they come out with. Is it any wonder they hold us in such contempt?
    The best example of which I think was Greenspan’s famous line:

    “If I seem unduly clear to you, you must have misunderstood what I said.”

    • Hi Kevin

      I think that there are several interrelated problems. Firstly the central banks have intervened in things way beyond their level of competence. Next they have started to do even more. Finally they are running very short of excuses.

  2. Is the answer to this simply that developed economies need to adjust their measure of what constitutes normal growth these days? Because we had a few decades of higher growth it does not mean that this is ‘normal’ and anything less is a ‘worrying outlook’. If good growth is now 1 to 2% then there is no reason why CB’s can’t increase rates ( other than competitive devaluation) and an interest rate of a few percentage will not ( or should not ) make any difference to business. Any company that can’t make a profit with 2-3% interest rate does not have a viable business model. Part of the problem is that their political masters ( who usually have very little business experience) are also stuck in the past, economically speaking.

    • Hi Pavlaki

      You are echoing in a way a line of my late father who often used to lament that many companies could not make bigger profits year after year. Sure some would and a few in growth industries can do it on a sustained basis but the ordinary firm/business?

      Although the counterpoint is the suggestion from Forbin that we need 2% growth these days or we are engaging reverse.

  3. Shaun, Carney may know nothing about science, but then the majority of those espousing ‘climate emergency’ obviously don’t either. But he was chairing the BIS sub-committee that instigated the global introduction of ‘climate change’ factors to be used in all investment decisions. His sticky fingers are all over creating the opportunities for the global elite to plunder our tax and utility bills.

  4. Hello Shaun,

    Re: “This means that they cannot give the public “greater clarity” and in fact have misled them which means they are undermining their own policies.”

    I would suggest that they know this and either do not care or they are following the plan, or both !


  5. ““It is not the beginning of a long series of rate cuts”: Jerome Powell.

    Well technically of course he is correct as it won’t be very long at all before we get to zero(especially as there will be the Carneyesque wording of rate rises in future statements to ensure markets never know what they will do next – they may even try to actually do a few rate hikes (to add to the confusion), probably re-instate QE(in the case of the UK 100% certain) and then go negative, looking at his whole statement it is a bit like that of a third rate horse racing tipster service that mentions so many outcomes and probabilities that in hindsight they can point to having picked the winner no matter whatever the outcome.

    I think this is going to lead to massive volatility in future as investors never know whether the central banks are going to keep supporting the ponzi bubbles they have created or let them fail.

    PS My previous target of 0.4% for the UK 5 year gilt yield has been achieved and exceeded and is currently 0.36%, much sooner than I expected, but I think it will put in a bottom for now and do a dead cat bounce for a while.

    • Hi Kevin

      Congratulations as indeed you did. I was looking at the numbers earlier and noted how the curve has inverted at that point ( the 2 year Gilt yield is 0.43% and the 10 year is 0.59%) but had forgotten your forecast.

      We should be getting some cheaper fixed-rate mortgage deals but I have not seen anyone mention them. Perhaps the banks are just widening margins.

  6. Hi Shaun

    All of this Forward Guidance is meaningless theatre. Most developed economies are debt laden and have been for years and are getting more debt laden with every year that passes.

    The natural rate of interest which balances growth and inflation at around 2% each has been going down for years and is still going down and is probably now little more than zero. If rates go up even a little the Ponzi will collapse. Debt deflation beckons as we get nearer the point where incomes are largely pre-empted by debt service and people can no longer afford any discretionary spend at all.

    It isn’t Forward Guidance, it’s Forward Obfuscation designed to distract from the reality; it isn’t to guide; it’s to hide.

    • Hi Bob J

      We are in a downwards trend channel where each high for interest-rates is lower than the last as is each low. In the UK we might find that 0.75% was the high for interest-rates in this cycle. As you point out this poses a lot of problems. But I suppose it could be worse as we could be in the Euro area starting at -0.4% or Sweden at -0.25%.

      Also another dash into the Swiss Franc would cause trouble as they are already at -0.75%.

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