UK financial types went home last Wednesday feeling betrayed by the BofE’s Mark Carney. More than betrayed – bushwhacked! Some even got pretty darn nasty in the press.
Wait until they arrive at work tomorrow morning!
In June of this year Carney reminded the markets that they – market participants - were not up to date, and had better price in a lift sooner than they thought (thanks dad); sterling exploded. Next, last week Carney highlighted the drop in Q2 earnings (-0.2%) and indicated that no, we can now put things off and can wait to lift until wages grow, likely into next year. Sterling tanked. Then this very day, in an interview with the Sunday Times, Carney indicated that he would not necessarily wait for wages to turn positive before the first lift. My goodness.
This little incident telegraphs the lunacy of “forward guidance,” the latest fashion in central banking. It can create nothing substantive, only havoc.
Carney and Yellen are mortals; neither has a better idea of what landscape lies ahead than most of us. It is asking too much, for goodness sake. Under King (who saw early on that forward guidance was nothing if not nonsense), under Volker, and under most of Greenspan’s term, it didn’t matter what their interpretation was; we had rules.
In our business – macro economics – all that counts is that one has a better idea of what the real sector will serve up than the next guy. That requirement has now been downsized; key now, at least for near-to-intermediate term trading purposes is to understand what one individual - a preacher to the market flock - makes of the situation. Our view on economic reality may well be correct but we have to survive the likely event of being trampled by the congregation.
Of course no one feels sorry for traders or forecasters. But “forward guidance” is corrosive past the harm to these types. Markets that swing violently on the expressed whim or conjecture of an appointed god are markets that discourage a healthy auction, or price exchange. These are circumstances that encourage many corporate planners and risk takers to simply stay put.
Fed policy is a retardant in the US. If Carney does not learn to keep it zipped then BofE policy will come to play the same role in the UK.
Robert Craven
Wait until they arrive at work tomorrow morning!
In June of this year Carney reminded the markets that they – market participants - were not up to date, and had better price in a lift sooner than they thought (thanks dad); sterling exploded. Next, last week Carney highlighted the drop in Q2 earnings (-0.2%) and indicated that no, we can now put things off and can wait to lift until wages grow, likely into next year. Sterling tanked. Then this very day, in an interview with the Sunday Times, Carney indicated that he would not necessarily wait for wages to turn positive before the first lift. My goodness.
This little incident telegraphs the lunacy of “forward guidance,” the latest fashion in central banking. It can create nothing substantive, only havoc.
Carney and Yellen are mortals; neither has a better idea of what landscape lies ahead than most of us. It is asking too much, for goodness sake. Under King (who saw early on that forward guidance was nothing if not nonsense), under Volker, and under most of Greenspan’s term, it didn’t matter what their interpretation was; we had rules.
In our business – macro economics – all that counts is that one has a better idea of what the real sector will serve up than the next guy. That requirement has now been downsized; key now, at least for near-to-intermediate term trading purposes is to understand what one individual - a preacher to the market flock - makes of the situation. Our view on economic reality may well be correct but we have to survive the likely event of being trampled by the congregation.
Of course no one feels sorry for traders or forecasters. But “forward guidance” is corrosive past the harm to these types. Markets that swing violently on the expressed whim or conjecture of an appointed god are markets that discourage a healthy auction, or price exchange. These are circumstances that encourage many corporate planners and risk takers to simply stay put.
Fed policy is a retardant in the US. If Carney does not learn to keep it zipped then BofE policy will come to play the same role in the UK.
Robert Craven
I completely agree with you on the lunacy of forward guidance--or should we call it "Open Mouth Operations"?
ReplyDeleteJohn