Of course markets have rejected "preposterous" forward guidance

While forward guidance has become incredibly fashionable among central bankers, with the Bank of England and European Central Bank adopting the tool, many claim that it is bunkum.

Economist Detlev Schlichter is one of those, and strongly disagrees with the notion that new Bank of England governor should be called one the "most talented central bankers of his generation".

The whole idea of forward guidance is, of course, preposterous. The market knows full well that policy will change if circumstances change. Should the economy recover more quickly, should the Fed’s actions put pressures on other central banks to also remove accommodation, should inflation rise faster, or should the pound come under pressure, the policy elite at the BoE will most certainly have to respond. Conversely, if the economy nosedives again or if another financial accident occurs, central bankers will cut rates again (maybe to negative levels?), and throw more money at the problem.

The market is, of course, frequently wrong in assessing the future. Also, the market’s assessment is constantly changing. But the market is still the most awesome machinery for data-collection and data-processing, and it remains unmatched by any institution, individual or group of individuals, even overpaid George Clooney lookalikes.


The potential for central bankers to do harm remains bigger than that to do good.

It's well worth reading the full post, as well as the pieces Detlev Schlichter has written for City A.M..