Breaking News
Get 40% Off 0
Is NVDA a 🟢 buy or 🔴 sell? Unlock Now

Central banks shelve guidance, in fits and starts, as inflation reigns

Published Jun 12, 2023 01:04AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. FILE PHOTO: Federal Reserve Board Chair Jerome Powell takes questions from the news media while holding a news conference after the Fed raised interest rates by a quarter of a percentage point following a two-day meeting of the Federal Open Market Committ

By Howard Schneider, Leika Kihara, Balazs Koranyi and William Schomberg

(Reuters) - Central bankers, who once considered obscurity central to their craft, are trying to wean the world from the predictability they've nurtured over 15 years of concrete guidance about their intentions and return to a time when policy starts, stops and occasional surprises were more the norm.

The endeavor is driven by recognition that renewed inflation may require higher and more frequently changed interest rates than has been the case since 2007, when a U.S. financial crisis opened an era of strong and often detailed central bank guidance that spanned the near crack-up of the euro zone, sluggish growth, an oil slump, pandemic and war.

"Communication comes with a cost of misinterpretation, and it also may limit flexibility," Federal Reserve Chair Jerome Powell said at a Fed forum last month. "We should use forward guidance sparingly when the course of policy is either reasonably well understood, or, on the contrary, is so dependent on uncertain future developments that little really can be said constructively about the future."

The current moment qualifies as that, with developed world central banks still trying to corral the worst inflation in 40 years, edging policy rates towards a level that will do the job but uncertain where that point may be or how their local economies will react.

FITS AND STARTS

The effort by policymakers to dial back the clock - to a time when they talked about risks and outlooks but did less to pin down the path of monetary policy - is off to a fitful start.

The Reserve Bank of Australia and the Bank of Canada showed the emerging model last week when, with little to no advance effort to steer public expectations, they resumed rate increases after inflation proved more persistent than anticipated. Both had held rates steady since earlier in the year.

The Bank of England in February removed its explicit guidance and tied decisions to inflation data. As prices continued to climb, investors duly priced in more rate increases, and with the outlook so unclear BOE Governor Andrew Bailey has simply avoided steering them in another direction.

The Bank of Japan, by contrast, still battling to raise perennially weak inflation, has left the core part of its guidance intact with a pledge to "patiently" sustain loose policies. Still, in a small but significant shift it has softened its promise to keep a wide variety of interest rates at "current or lower levels."

The European Central Bank says it has adopted a "meeting-by-meeting" approach with "a strong preference against returning to outright forward guidance on policy rates." But as a practical matter officials have provided such a strong steer - a "directional bias" they call it - that markets have put nearly a 100% probability on a rate increase at the June 15 meeting. A long list of individual policymakers have said rates should rise in July, too.

The Fed, meanwhile, faces a tricky moment at its meeting this week.

Though Powell in May warned that the strongest forms of forward guidance aren't useful when officials are less certain about the outlook, U.S. central bankers at their June 13-14 meeting will still have to release quarterly projections that include point estimates of the federal funds rate at year's end.

DOT PLOT THICKENS

Meant as a tool for transparency to show how officials feel the economy is likely to evolve, the so-called dot plot is often construed as rate guidance, a situation former Fed Chair Ben Bernanke said was "not ideal" for policymakers who don't want to tie themselves down.

"People don't understand the difference all the time between a commitment and a forecast," Bernanke said at last month's forum alongside Powell.

If the projections show the policy rate moving up later this year, officials will likely face questions if they do as expected and hold rates steady at the June meeting. If the rate is not seen moving up, they will face questions about not being responsive to recent data showing strong inflation despite pledging to be "data dependent."

"Walking the optionality tightrope won't be easy," said EY-Parthenon Chief Economist Gregory Daco. "There is some element of cognitive dissonance in waiting...to tighten policy if it's necessary today."

That "dissonance" may become more common if investors and analysts end up, as they are now, in a will-they-or-won't-they debate ahead of each Fed meeting.

But it isn't necessarily a bad thing. After 15 years of sequential crises, it may mark a return to normal.

The current tightening cycle, St. Louis Fed President James Bullard told Reuters earlier this year, is a "return to kind of ordinary monetary policy...Data's coming in and it's indicating that you should go up or down and you would do that appropriately - more like you might have seen in the 90s," when central bank communications were more constrained.

Central banks shelve guidance, in fits and starts, as inflation reigns
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.
  • Any comment you publish, together with your investing.com profile, will be public on investing.com and may be indexed and available through third party search engines, such as Google.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (1)
Derick Lim
Derick Lim Jun 12, 2023 4:54AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Central banks should just move forward with AI waves.... inflation and recession doesn't exist in AI world....
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email