Fed, ECB and Major Central Banks Resort to Forward Guidance
- Forward guidance is setting expectations for economic health and possible monetary policy courses
- Big efforts to upgrade stimulus (ECB, BoJ) and tighten (Fed) in a reflection of confidence are failing to lift markets
- With policy options growing limited and impact wavering, the reliance on forward guidance (jawboning) will intensify
Having trouble trading in the FX markets? This may be why.
Both the ECB and Fed are steering monetary policy in an effort to bolster confidence. Given they are on opposite extremes of the spectrum - one has thrown the kitchen sink of stimulus at the market and the other has hiked - that may seem irrational. However, stimulus is aimed at bolstering confidence in reaching economic objectives and 'normalizing' would only be possible if the central bank was confident they would see positive growth/employment/inflation trends as intended. That said, tangible efforts are not resulting in the market responses - a vote of confidence that the results will be realized - that officials are intending. Quickly running out of room and with credibility starting to waver under big efforts, there are few options left. One of very few the flexible and abundant tools left is forward guidance. Already in use, expect it to be a more central effort to shape market expectations through forecasts going forward. This includes the Fed where Chairwoman Janet Yellen made a more distinct connection to future policy direction to a factor that has unnerved global market participants: China. We discuss the rise, influence and importance of forward guidance for the trader and investor in today's Strategy Video.
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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.