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HSBC’s King Sees More Focus on Forward Guidance as Fed Tapers

HSBC Holdings Plc Chief Global Economist Stephen King. Photographer: Pete Marovich/Bloomberg
HSBC Holdings Plc Chief Global Economist Stephen King. Photographer: Pete Marovich/Bloomberg

Nov. 29 (Bloomberg) -- The Federal Reserve will probably focus on assuring investors it will maintain low interest rates as it prepares to reduce bond purchases, according to Stephen King, chief global economist at HSBC Holdings Plc.

The increased effort aims in part to avoid a repeat of the sell-off in global assets this year after Fed officials signaled they may soon start to taper the monthly $85 billion in bond purchases, which King said was more “violent” than the central bank had expected. The Fed won’t cut purchases until its March 18-19 meeting, according to the median estimate of 32 economists in a Bloomberg survey on Nov. 8.

“They’ll be very keen to say, ‘Look, we might be tapering but we want to offer other ways of demonstrating our monetary support’ for the economy,” King said in an interview in Dubai yesterday. “That effectively means you’re replacing an actual transaction approach to monetary policy with a verbal commitment. Verbal commitment wasn’t really on offer back in May and June.”

Central banks in advanced economies are experimenting with more unconventional policies such as communication after they cut interest rates to near zero and started buying government bonds in an effort to boost economic growth. The European Central Bank introduced so-called forward guidance in July, and the Federal Reserve could take steps to strengthen the policy further, Federal Reserve Bank of St. Louis President James Bullard has said.

Lower Inflation

The emphasis on communication comes as policy makers struggle to meet inflation targets for next year, King said. Citigroup Inc.’s Inflation Surprise Index for the group of 10 advanced economies dropped to negative 21.8 in October, the lowest since April 1998, signaling that data fell short of analyst estimates.

“After all the talk about QE possibly creating inflation, I think central banks are going to find next year that the risk will be that inflation will be lower than they’d like it to be,” said King, author of “When the Money Runs Out: The End of Western Affluence.”

The European Central Bank lowered its key interest rate this month by a quarter point to 0.25 percent after a drop in inflation to the slowest pace in four years threatened price stability. ECB Governing Council member Ardo Hansson said in a Nov. 22 interview that the central bank stands ready to cut borrowing costs further and is technically prepared to make its interest rate negative.

Yet even as policy makers pledge to extend the experiment with unconventional tools, monetary policy has reached a stage where “it’s just a case of working how best to give the impression that we’re accommodating for the foreseeable future,'' King said.

To contact the reporter on this story: Alaa Shahine in Dubai at

To contact the editor responsible for this story: Andrew J. Barden at

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