Forward Guidance

When central bankers speak, everybody listens. Not everybody, however, understands. For a long time, the central bankers liked it that way. They seemed to recite high-toned gibberish on purpose: Say too much too clearly, the thinking went, and they could give away the secrets to their god-like power to make economies rise or fall. Then the global financial crisis ushered in a new consensus that straight talk is better, that giving investors useful guidance to steer expectations for interest rates — already near zero — would help them navigate the worst recession in a generation. All of the world’s big central banks adopted the new communications strategy, known as forward guidance. Sometimes it backfired. Over time, they've adjusted the message as U.S. interest rates began to creep up again.

For more than six years U.S. Federal Reserve officials committed to keeping rates near zero, sometimes for specific chunks of the calendar, sometimes until certain thresholds for unemployment and inflation were met, and sometimes for bafflingly hazy periods, such as the “considerable time” that appeared in 2014. That gave way to being "patient," which also disappeared in the lead up to the first rate increase in nine years in December 2015. Since then, they've gotten markets used to the idea that they will set policy meeting-by-meeting, based purely on the economic data. So ended an extraordinary era of communications that began in 2008. Still, in contrast to the old days, they continue to provide markets with a regular steer on where rates are likely headed. By contrast, the European Central Bank has stuck with vague language all along. Central bank watchers around the globe have also latched on to new forecasts and inflation targets provided as part of the forward guidance push, some of which have sown confusion. The shifts have triggered bouts of volatility in global markets, reminding some critics of the blessings of bewilderment. Conflicting statements from Bank of England Governor Mark Carney in 2014 prompted one lawmaker to say he was acting like an “unreliable boyfriend” — “one day hot, one day cold.”