The Fallacies Of Forward Guidance

Tyler Durden's picture

With the recent adoption of explicit forward guidance as a stimulative policy tool by the major European central banks, virtually every major central bank is now using the tool in some form. The potential benefits and dangers of such policies as central bank communications have evolved are unclear as "the form of guidance" matters. As Robin Brooks notes, and is so well illusrated below in the example of the Riksbank's and Norges Bank's 'failures', "[In terms of implications for rates] the jury is still out on how well forward guidance works. What is clear, though, is that markets prefer 'deeds' to 'words'."

Forward Guidance has become extremely important...

As Central bank communications (whether at extremes of policy or not) have evolved dramatically over the past 20 years...

(click image for massive legible version)

Especially intriguing is Janet Yellen's note:

As recently as two decades ago, most central banks actively avoided communicating about monetary policy. According to Janet Yellen, the current Vice Chair of the Federal Reserve who was recently nominated to succeed Chairman Bernanke: “Montagu Norman, governor of the Bank of England in the early 20th century, reputedly lived by the motto “never explain, never excuse”.


The conventional wisdom among central bankers was that transparency was of little benefit for monetary policy and, in some cases, could cause problems that would make policy less effective.

Source: Janet Yellen, Speech: “Communication in Monetary Policy”,
April 4, 2013.

We have little historical precedent for judging the efficacy if explicit forward guidance. However, as Goldman Sachs notes, Norway’s Norges Bank introduced a form of forward guidance in 2005, while Sweden’s Riksbank followed soon after in 2007; and so we look to how well their "guidance" has fit reality (or shaped markets at the time)...

Lessons From Forward Guidance Pioneers

Forward guidance is not a policy reserved for only extreme situations. Indeed, well ahead of the global financial crisis and before the “zero lower bound” of policy rates motivated some central banks to explore the role of communication tools to achieve further easing,

Explicit but conservative

The Scandinavian central banks’ form of forward guidance is among the most explicit in nature: both Norges Bank and the Riksbank publish a “policy rate path” several times a year detailing the level of the policy rate expected by the (majority) of the Executive Board of the central bank over their forecast horizon (around three years). In addition, the Scandinavian central banks publish a range of economic forecasts, such as growth, inflation, the output gap and the unemployment rate.

Although the form of forward guidance may be one of the most explicit currently in place, the nature is more conservative: the “policy rate path” is a conditional estimate of future policy rates - based on the economy and market conditions – not a commitment.

With no intention of attempting to “tie their hands” in the way that Fed-style forward guidance aims to do by promising to keep rates “lower for longer” than would normally be the case, Norges Bank and the Riksbank maintain full discretion at all times. Forward guidance in Scandinavia is therefore a pure communication tool rather than an innovation in monetary policy strategy.

Relevant for the ECB?

Scandinavian central banks’ lengthy experience with forward guidance may be more relevant for the ECB’s nascent forward guidance than what one might immediately think. While the ECB’s style of forward guidance is rather vague, stating only that policy rates will remain at current or lower levels for an “extended period of time”, compared to the Scandinavian central banks’ detailed policy rate paths, both the ECB and Norges Bank/the Riksbank maintain full discretion of their policy rates at all times.

This is a crucial similarity. And with a shared fundamental underpinning of forward guidance, the Scandinavian experience may shed light on whether a more explicit form of forward guidance by the ECB, while maintaining full discretion, might help the ECB more effectively influence Euro area money market rates.

Gains from transparency despite discretion

A look at how past shifts in the Riksbank’s published policy rate path have impacted market pricing suggests that changes to the policy rate path can be just as important to shaping forward market pricing as changes to actual policy rates. Because the form of communication at the Riksbank is so explicit, this experience provides a likely upper bound to what can be achieved (e.g., by the ECB) with a fully transparent form of forward guidance that still allows for full discretion.


While we do not expect the ECB to adopt much more explicit forward guidance, let alone to actually publish a policy rate path any time soon, the Riksbank experience suggests that the ECB’s impact on market rates may be enhanced by increasing the information available to the market regarding the ECB’s view of future likely policy developments. This could take the form of increasing the length of the ECB’s forecast horizon (currently only between 1 to 2 years) or providing a greater account of the Governing Council’s deliberations.


[ZH: While the result is still out, one thing seems very clear from the two charts above... Central bank "forward guidance" appears always and forever overly-confident of their ability (or willingness) to tighten...]

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Bearwagon's picture

"When it get's serious, you have to lie."  You all know who said that.
"When you do something like that, people will get upset. That's why you would want to do it over the weekend." Dr. Strangelove

And that's about all forward guidance europe will need.

Vampyroteuthis infernalis's picture

Next you are going to tell me that say one thing and do another is wrong?

Bearwagon's picture

I have no intention to tell you anything. If you really ask me: Think for yourself, no matter what me or anyone else says. But Strangelove (that's Schaeuble, btw.) would just laugh at you. Prepare to be dieselboomed sooner or later. All of you, and me amongst you ...

philipat's picture

With all this transparency, when will the Bernank tell us about Gold?

As Ron Paul said, all the important stuff gets done behind closed doors, In other words, all this transparency and "Forward guidance" is just another way of distracting attention from the real issues

RockyRacoon's picture

Reckon we could say that Central Bank forecasts are a tad optimistic over there in Euroland.  I'm so glad that our own Federal Reserve is more, uh... reserved about projections for the U.S..  Must be why it's called that.

Now, where the hell is that SARC key.  Must be on this keyboard someplace.....

Nothing but the truth.'s picture

 Only a central banker could come up with this ' forward guidance ' terminology. What a load of bullshit - the weather man gives forward guidance in his weather predictions for fuck sake.  Mind you CB's are no better and probably far worse, than the weather forecasters in their predictions.

Yen Cross's picture

  Bernanke on the final leg of his Chairmanship...

Bearwagon's picture

Yes, indeed. Each new chairman has brought disturbances - but shirley this time is different. Just as an emerging great coalition in Berlin will not mean anything new, because, you know, this time is different ...    ;-)

disabledvet's picture

markets are markets. the Fed only has credibility when they're not afraid to take them on "in a rational manner." Greenspan folded in 1998 in his famous "how is one to know?" quip. Well...the market knew...and by the time he recovered from that Tulip Mania he was gone and Wall Street was flattened. I think a good argument can be made that QE is/was nothing more than a "time out" for the wildings on the Street (that are ongoing i might add.) Any incoming Fed Chairman should not have a problem with long as the risk is contained to Wall Street doesn't spill over into the taxpayer. With war off the table and ACA apparently "on" (as in spending gone bad) if i were on FOMC i would argue "per Yoda" now is the time to "normalize." I think a good argument can be made that taper failed this summer because both the war and the (unknown) ACA disaster were on the table. this caused Chairman Bernanke to be "surprised" at the huge move higher in interest rates, the big move in the dollar and Detroit going up in flames. I think the Fed can learn from this and go forward with more...efficacy...this time around. But of course we'll see. "non word deeds" will be "the word" not just mere separation of words and deeds.

Bearwagon's picture

Not to disagree with you ... but ... this "market"-thingy you talk of seems from my perspective, like ... thousand years ago.

moneybots's picture

" I think the Fed can learn from this and go forward with more...efficacy...this time around. "


It is not about learning.  It was written long ago that there is nothing new under the sun.

Greenspan wrote back in the 1960's that 1920's FED policy lead into the Great Depression.  He already knew back then, not to do it again, yet he doubled down on 1920's FED policy when he ran the show.  Bernake has doubled down again, with quantitative easing. 

The huge move higher in rates should not have surprised Bernanke, as he was the one who suppressed them in the first place.  Newton's law does not apply only to physics.

I am Jobe's picture

karma is a bitch. Bernanke's  family will suffer thru this. 

Richard Chesler's picture

hind·sight: noun 1. understanding of a situation or event only after it has happened or developed.

"with hindsight, I should never have gone"


RockyRacoon's picture

Not much better vision is achieved from the rearview mirror as everything is reversed, not the sideview mirror as "objects are larger than they appear".   The view from the windshield prevents us from seeing the forest for the trees.  Bottom line:  No view is satisfactory.   We're driving blind.   It's only when the mangled bodies are pulled from the wreckage at the bottom of the cliff that we see the true picture.

Bearwagon's picture

But some of us are of the opinion, that they, engulfed in several helium-filled air-bags, will just fly away and leave the scene of accident simply below them. ;-)

moneybots's picture

"With no intention of attempting to “tie their hands” in the way that Fed-style forward guidance aims to do by promising to keep rates “lower for longer” than would normally be the case, Norges Bank and the Riksbank maintain full discretion at all times."


It seems a lackluster economy, based on continuing financial fraud, is tying their hands, anyway.

falak pema's picture

the fallacies of forward guidance in Syrian proxy war now gone out of control for PAx Americana :

Israel Furious At Obama For Leaking Syria Strike - Business Insider

This is obviously a sign from "O"'s admin to Bibi Yahoo that there will be no more cover up.

"I am dead scared of what Snowden can divulge on our past hanky panky. So I am opting out, especially as Putin has me stymied and Saudis have gone bat shit crazy. Man, its no fun to be -- You the Man, Usa!"  

Its becoming a pain in the ass. 

What will Bibi say n do now?

Where are we going in Syria ? 

Bearwagon's picture

Are you asking seriously? Bibi will say what his spin-doctors evaluate as the best story about, say "the triumphal homecoming of a dead war hero", and wait for the situation to comfortably escalate. And where are you going in Syria? Iranward, ho! Anything else unclear? ;-)

falak pema's picture

As its a proxy war the problem is not Syria per se. Syria has been an Assad prison since 40 years and who cared?

The issue is Oil patch and its future. Its Saud/Q/EMIR/KUW/IRAK/IRAN/AZER/KAZAK/TURKMEN complex. All potential Pax Americana legacy of past. NON NEGOTIABLE, post USSR fall, but now not so much now. 

The great game here is who controls the oil thread and petrodollar reserve. Now that is the stuff that you fight WWs for! 

So yes, where will Syria take the Pax Americana alliance, if its the first step in the fall of vital dominoes; for oil, for reserve, for MIC hegemony.

Bibi is just a pawn in this game like a Templar was at Jerusalem of old; before it fell.

Bearwagon's picture

I like the way you think ...    but be warned: If you continue to think in that direction, you certainly will come to very depressing conclusions, and a human being can only bear that to a limited amount. Besides that, go on, I think you're on to something ...

q99x2's picture

It is accurate. I used to see that stuff everytime I came down off of a drinking binge.

ebworthen's picture

Solution:  get rid of central banks.

Allow individuals to set expectations and behavior.

We have a centralized "baffle 'em with bullshit" manipulator combined with an MSM propaganda machine; therefore, everyone is operating on false assumptions, delusional expectations, and debt.

Racer's picture

Charts that look like they are blowing in the wind

Yen Cross's picture

 Anytime I look at earnings, I compare MoM, QoQ, YoY, figures. No matter what CNBS says,  60% of reported earning are under 2012 earnings for the quarter, month & year.

 When you dig into Delta, that's where you really see the book fixing. Payouts, One time write downs, Capex<> paybacks, Bonuses/outside contracts, stock repurchases ect...

 This fucking clown show has an end. I think it's going to be "Retail Shitsville" over the holidays.

 IMHO Bitchez

ebworthen's picture


I laughed on Friday when some talking head on CNBC said holiday sales were going to be better than last year.

As if people getting their 25%-40% higher insurance bills won't adjust their spending.

Also, anyone with an ARM has less money compared to last year.

SunRise's picture

Anyone with an arm is about to lose it.

moonstears's picture

+1 for the play on words(acronyms)!