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The Fallacy Of Forward Guidance In 4 Charts

Tyler Durden's picture


In recent months the Fed (and ECB for that matter) has taken up the mythical charm offensive of "forward guidance" as a way to assure markets that punchbowls will remain free and available for as long as it takes. At the same time, the Bank of England has been shown up (and lost credibility) over its threshold-ignorance, the Fed has also now started to hit the wall on any 'quantitative'-based forward-guidance communications policy, proposed Fed vice-Chair Stan Fischer is skeptical: "you can't expect the Fed to spell out what it's going to do... because it doesn't know;" and finally Bob Rubin slammed the Fed, saying "their forecast models don't work.. and forward guidance [has no validity] as it is impossible to know what is going to happen in 6 months." So today's BIS report on the the fallacy of forward guidance and risks to central bank reputation (and the following 4 charts) suggest faith in central banker omnipotence may be fading.

Via BIS,

Central bank reputation

Forward guidance exposes central banks to various reputation risks. If the public fails to fully understand the conditionality of the guidance and the uncertainty surrounding it, the reputation and credibility of the central bank may be at risk if the guidance is revised frequently and substantially. This is particularly relevant in the case of calendar-based forward guidance, in which deviations in the preannounced timetable may be perceived as reneging on a commitment even if conditions change unexpectedly.

And while state-contingent forward guidance helps to address the risk of an appearance of reneging, it raises others. For example, the announcement of unemployment-based thresholds could be seen as signalling a fundamental shift in monetary strategies and goals. And, as history has shown, the perception that central banks have elevated the role of real variables in monetary policy frameworks can adversely affect a central bank’s credibility for price stability. A widespread perception of this could also create policy uncertainty about what central banks are truly aiming at, which would be counterproductive in the current post-crisis environment. Further, central banks may ex post be seen as having seriously misjudged the outlook, especially if such misjudgments are not widely shared with other forecasters.

So here are 4 central banks that have long provided forward guidance and their actual results...

"Nailed it?" or not at all?

Stan Fischer sums it up:"we don’t know what we’ll be doing a year from now. It’s a mistake to try and get too precise," and that "you can’t expect the Fed to spell out what it’s going to do... because it doesn’t know."

So why do so many still "believe"? Take another look at those 4 charts above? Hardly inspires confidence in Central Bankers' ability to know anything, let alone provide "forward guidance" as to their policy action path...

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Sun, 03/09/2014 - 18:53 | 4528689 Motorhead
Motorhead's picture

Charts, bitchez!

Sun, 03/09/2014 - 19:00 | 4528701 ZerOhead
ZerOhead's picture

It looks like they just can't get to where they want to go from where they are...

Sun, 03/09/2014 - 20:30 | 4528978 icanhasbailout
icanhasbailout's picture

will draw upwards sloping lines and appear on TV for food

Sun, 03/09/2014 - 18:59 | 4528695 ebworthen
ebworthen's picture

Central Banks provide overly optimistic forward guidance because it accomplishes their dual mandates of:

  1. Fooling the public with outright lies.
  2. Juicing banks with taxpayer money.

"Ooops, things aren't as good as we thought, Stop Taper/More QE/Print."

Sun, 03/09/2014 - 19:00 | 4528709 prains
prains's picture

those are like the cliffs of Dover, eventually as you're "guided" forward you have to step off the cliff, like lemmings to water


until you turn around and face your enemy.......

Sun, 03/09/2014 - 19:01 | 4528711 Cognitive Dissonance
Cognitive Dissonance's picture

"Central bank reputation"

LOL. This is one of them thar oxymorons.......right. Like military intelligence?

The only 'reputation' the central banks have is as the keeper of the punchbowl. All the rest is trumped up propaganda regarding their political independence and moral high ground.

Sun, 03/09/2014 - 19:09 | 4528743 logicalman
logicalman's picture

You are being rather kind.

The only 'reputation' central banks have, with anyone not hypnotized by MSM, is that of a criminal organization that makes the Mafia look like a bunch of rank amateurs.


Sun, 03/09/2014 - 22:39 | 4529322 old naughty
old naughty's picture

Please, i beg you, stop comparing them mafia to bansters...

true we exists for our families too; but we do not CARE NOT to write our laws.

Sun, 03/09/2014 - 19:01 | 4528715 Hopeless for Change
Hopeless for Change's picture

This should only surprise people who expect the illuminati, who learn nothing from history, to accurately predict the future.

Sun, 03/09/2014 - 19:13 | 4528753 logicalman
logicalman's picture

The future is not predictable - too many variables.

History does, however, put things in perspective and give clues.

I'm not referring to the 'history' taught by the school system, by the way, which is more propaganda than real history.


Sun, 03/09/2014 - 19:03 | 4528721 VWAndy
VWAndy's picture

Im no expert, but is that what a dead cat bounce looks like?

Sun, 03/09/2014 - 19:03 | 4528722 Al Capowned
Al Capowned's picture

My forward guidance to central bankers is watch out for bitcoin.

It's not only the low level jobs that are going to get automated.

Sun, 03/09/2014 - 19:09 | 4528741 Iam Yue2
Iam Yue2's picture

So why do so many still "believe"?

Existential comfort typically.

Sun, 03/09/2014 - 19:15 | 4528760 logicalman
logicalman's picture

It's hard to say to yourself that the world model you've had for 30 years is crap.

I was fortunate, my parents were basically anarchist so I didn't have to do that.

Sun, 03/09/2014 - 19:11 | 4528747 Racer
Racer's picture

Hilarious charts and calling them out for what they are = propagadist liars

Sun, 03/09/2014 - 19:12 | 4528749 A Lunatic
A Lunatic's picture

I hadn't realized we were moving forward.......

Sun, 03/09/2014 - 20:26 | 4528959 MollyHacker
MollyHacker's picture

The music stopped but the merry-go-round takes time to stop Bitchez.

Sun, 03/09/2014 - 20:57 | 4529046 CURWAR2012
CURWAR2012's picture

Charts need viagra

Sun, 03/09/2014 - 22:01 | 4529225 Downtoolong
Downtoolong's picture

I saw laughable charts like these for oil prices back in the mid 1980’s, with repeated forecasts projecting a rise from sub $20/bbl to $100/bbl splitting off from an obvious 3 year downtrend. The charts were produced by the Central Planning Group of a major international oil company (I kid you not, that’s exactly what it was called). Not that they were wrong, they were just off by 25 years. They probably think of themselves as real visionaries by now.

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