One of the premier features that was to help markets interpret upcoming policy moves made at the Federal Reserve was the idea and implementation of: forward guidance. This new feature was enacted by the former Chairman Ben Bernanke. The reasoning? In a nut shell it was no more than a heads up to the financial markets of what the Fed. would do, and when. i.e., Hit this metric of X and the Fed. will do Y. So – position accordingly.
Although that’s an extreme over simplification, in effect, that’s precisely what it was supposed to be when contrasted with one “Fed. talk” laden speech against another. This way the markets (as well as other central bankers and/or governments) could take solace (in theory) of not being adversely surprised by some sudden, unannounced, or unforeseen policy decision and announcement from a FOMC meeting.
An example might be: “We’ll do X if Y is reached. However, if Y is not – one can take solace that we’ll stand pat until the next meeting.” Rather than leaving everything from A-Z a guesstimate in between. Why? Because the natural conclusion is when it comes to money: confusion, or guessing equals selling or, at the least, non-participation. i.e. Sitting on hands.
Again, it was in 2012 this type of communication strategy was implemented by Ben Bernanke. Then, he himself, did the exact opposite. To wit:
From The Economist™ in February of 2014:
“IN DECEMBER 2012 Ben Bernanke, then chairman of the Federal Reserve, reached deep into the central banker’s bag of tricks and pulled out something novel. Using a new trick which became known as “forward guidance”, the Fed declared that it would not raise interest rates until America’s unemployment rate dropped to at least 6.5%, so long as inflation remained below 2.5%. In August 2013 the Bank of England followed suit. Mark Carney (pictured), its governor, promised to leave rates low until unemployment was down to at least 7%—again, so long as inflation and financial markets remained well-behaved. In both America and Britain, unemployment fell quickly toward the thresholds. Yet neither central bank reacted by moving to boost rates, leading critics to argue that forward guidance had failed and should be scrapped. Central banks are instead tweaking their guidance: the Bank of England will update its guidelines on February 12th, and the Fed may soon do the same.”
As one reads the above you can’t help but be astonished. Again: “…the Fed declared that it would not raise interest rates until America’s unemployment rate dropped to at least 6.5%, so long as inflation remained below 2.5%.” How’d that work out? Yes, it’s a rhetorical question.
Using just the aforementioned criteria given by the Fed. in 2012 as “to give guidance” we could go on to list a litany of similar examples. Never-minding how many FOMC meetings were held where this criteria was hit, and hit, and hit again – and a policy move of raising rates was ever done. Well, there was actually one move. What move you ask?
Lower the criteria. 6 became 5, and now since we’re at 4.9. It’s not a number that means X,Y, or Z anymore. It’s now ___________(to be announced….maybe…and subject to change….definitely.)
As confusing and obtuse many a Fed. dissertation has become. What has been even more confusing too me is the near zealot manner I’ve heard one economist after another state with surety they know, or can interpret, precisely what the Fed. will do next based on what the Fed. has communicated.
It doesn’t matter if it’s some “next in rotation” guest economist, or their own resident “Chief economist.” The inclinations are always the same. i.e., “The Fed. will do this when that happens. And, that has yet to happen. So, those who say one should worry, or think different, just don’t know what they’re talking about and should be ignored.”
If one puts aside all of the moving metrics and policy talk that happened during Mr. Bernanke’s tenure. How would one assess “the guidance” or the “communications for clarity” we now have emanating from not only the Fed., but also, central bankers globally? Crazy Town is the only thing that comes to my mind. (Hint: look to the SNB or BoJ for clues)
The Federal Reserve itself has made so many pauses or “moving of the goal posts” since 2012 alone, there is not enough digital ink to list them all. While as of today under Ms. Yellen’s tenure it’s been communicated that those once aforementioned data points are now no longer as weight-bearing for policy moves as they once were. Now instead of unemployment data, or inflation data, we’re now “data dependent.” And “data” represents whatever the Fed. decides whether today, tomorrow, or right now. I guess 4.9% which once represented statistically full employment doesn’t mean what it once was. Unless they decide it does. Or – doesn’t. Maybe.
Just look at the communication delivered at the latest FOMC presser that took place just this past December. The Fed. declared in a unanimous voting of the affirmative it was fiscally prudent to raise interest rates, even if it were ever so slightly, as to begin the path towards more normalized accommodation. This was all predicated on what everyone was made to believe not only “the data” but more importantly, “a fulfillment of their forward guidance.” For remember, that “forward guidance” was thwarted in August and delayed because “data dependent” morphed into “international developments.” There was no “guidance” for that one was there?
As soon as the markets showed weakness following that “international development” that hit the U.S. developed markets in the form of a market selloff. The Fed. reversed course and did exactly what it implied it would not do – and punted till the next meeting. All against a backdrop that “data” was not supposed to mean solely “market” data. Yet, that’s what the move implied as was interpreted. Whether rightly or wrongly. And no official “communique” was going to change minds regardless.
And here we are just two months since and we’ve had one Fed. official after another insinuate future “rate hikes” are both on the table and off the table. While QE will not be forth coming – unless it’s needed, definitely, if and when. Maybe. But don’t count on it – unless you need too. I think.
This is the near insane way one has had to look to monetary policy makers and try to both run a business, as well as for others – run a country. Having to decide what policy means today or, if it means today, what it meant yesterday. Then; try to formulate and put to work real business plans or national policies for growth based on current directives, insinuations, flip-flops, and more. This is not only frustrating – it borders on lunacy trying to even comprehend.
This communicated confusion also helps to elicit precisely the greatest, most dangerous of monetary manifestations to come into fruition. Here is where companies, people, as well as governments won’t commit to anything other than: Nothing. Or, worse – sell everything. Which is the antithesis of what today’s Keynesian devotees are trying to manifest. This is what “forward guidance” has wrought: directives straight to “Crazy Town.”
There is one more extreme example coming up that may show just how much central banks have lost any remaining credibility. Where participants of all stripes or markets will no longer heed, or wait, to see what move a central bank may take in the future. That event happens later tonight in the U.S. or Monday morning in Asia as the markets react to what many believed (and possibly positioned for) might be a watershed event for coordinated, along with sizable interventions, via the G-20 participants that concluded Saturday. Many were implying, and inferring, possible “Plaza Accord” styled accommodations.
There was great enthusiasm expressed by many of those participants and inferred the same by the markets. Only problem? It seems once again it was a meeting of all talk – no action.
Now we’ll just have to wait and see if the markets will act first and ask questions later once its realized it was they who were crazy to think anything other than jawboning would take place.
© 2016 Mark St.Cyr