The short answer is because their Expectations are what drive policy, and Fed Forecasts are what drives their expectations . . .So it was with some amusement that I read that Stanley Fischer, former head of the Bank of Israel, former thesis adviser to Ben Bernanke at MIT, where he also taught notable economists such as Mario Draghi, Larry Summers and Greg Mankiw, admonished Bernanke about forward guidance:
Thus, despite their terrible forecasting track record, Fed forecast matter to policy implementation.
At the CLSA Investors Forum in Hong Kong Monday, Mr. Fischer suggested Mr. Bernanke shouldn’t get “too precise” in guiding markets. The Fed has raised investors’ expectations with greater communication. But this can give markets a false sense of comfort, as shown by confusion last week over the Fed’s decision to hold bond purchases steady.Is this a case of too much information? Is all this forward guidance actually creating market volatility, instead of dampening it?
This lesson applies to Mark Carney, too. The Bank of England boss entered office this summer intent on providing guidance. Yet telling investors unemployment could be so slow to fall that interest rates might stay steady until late 2016 has been greeted by market skepticism: yields have risen in response.
Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). The opinions and any recommendations expressed in the blog are those of the author and do not reflect the opinions and recommendations of Qwest. Qwest reviews Mr. Hui’s blog to ensure it is connected with Mr. Hui’s obligation to deal fairly, honestly and in good faith with the blog’s readers.”
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