"Everyone now seems to be doing forward guidance'," says Jeremy Warner on Telegraph.co.uk. The US Federal Reserve started it. Bank of England (BOE) governor Mark Carney used the term at his first Bank meeting last week. The European Central Bank (ECB) has also "caught the habit". But what is it?
It means indicating how long and under what conditions interest rates are likely to remain low, or money will continue to be printed. It is one of the unusual measures central banks have resorted to since the crisis, and the idea is to boost confidence and activity by reassuring investors, consumers and businesses that loose monetary policy will endure until the economy is strong enough to cope without it.
When will interest rates rise?
The ECB president, Mario Draghi, having declared just three months ago that "we do not pre-commit on interest rates", last week said he "expects the key ECB interest rates to remain at present or lower levels for an extended period of time". In Britain, Carney said that the rise in long-term, market interest rates "was not warranted by the recent developments in the domestic economy". In other words, the markets have got it wrong and the Bank's benchmark, short-term interest rate will stay low for some time. Next month he is expected to propose a formal threshold for when the Bank rate should rise when GDP growth reaches a certain level, perhaps.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The ECB and Carney had no choice, says Warner. Now that the Fed has started talking about tightening, US Treasury yields have started to creep up. As American debt sets the tone for other bond markets, long-term interest rates elsewhere have risen too. But "it's plainly far too early for Europe to tolerate any monetary tightening".
British balance sheets are also in no fit state to absorb a rise in interest rates, "or at least not without killing the growth fairy stone dead". Thanks to Draghi and Carney, European markets "breathed a collective sigh of relief", said Alister Gaines of CDC Wealth Management.
Mollycoddling the markets
Economist.com's Buttonwood blog
It is also ironic, for that matter, that "investors who otherwise believe in free markets" accept central bankers setting the supply and price of money, as Tim Price of PFP Wealth Management points out and, via forward guidance, attempting to set the price of money far into the future. For all the column inches lavished on central bankers and their pronouncements, you'd think they were good at what they do.
Yet in the past 20 years, the West has experienced continual bubbles, culminating in the credit binge and bust. Soon, as we pointed out recently, central bankers will attempt to wind down unprecedented money printing without causing shocks. Yet banks and investors have loaded up on overpriced assets in recent years and a sharp sell-off in US bond markets could choke off America's recovery. Given central banks' record, investors should keep their tin hats handy.
-
Will the Bitcoin price hit $100,000?With Bitcoin prices trading just below $100,000, we explore whether the cryptocurrency can hit the milestone.
-
Inheritance tax receipts jump 11% even before Autumn Budget overhaulOfficial figures show inheritance tax receipts are rising even before the chancellor’s changes to reliefs
