Global Economic Perspectives: Fed forward guidance: beware the sledgehammer
Deutsche Bank Research United States Economics Date 1 March 2016 Global Economic Perspectives Fed forward guidance: beware the sledgehammer ________________________________________________________________________________________________________________ Deutsche Bank Securities Inc. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015. Peter Hooper Chief Economist (+1) 212 250-7352 peter.hooper@db.com Michael Spencer Chief Economist (+852) 2203 8303 michael.spencer@db.com Torsten Slok Chief Economist (+1) 212 250-2155 torsten.slok@db.com Matthew Luzzetti Economist (+44) 20 754-73288 matthew.luzzetti@db.com As the Fed begins to escape the grasp of the zero lower bound, it has shifted its guidance to the markets about possible future policy moves from a clear time-based format to a less certain data-based format. Economic theory and empirical evidence reviewed in a recent 100-page report on Fed communication by the US Monetary Policy Forum say this is a desirable development. Time-based guidance sets policy on a relatively predetermined course that is found to inhibit desirable market reactions to macroeconomic surprises. It can also encourage excessive risk taking. The USMPF report that we review in this GEP exhorts the Fed to avoid using time-based guidance except under unusual circumstances, and market participants and observers including the financial press to be less fixated on time and more sensitive to possible changes in the Fed’s data-based reaction function. The unusual circumstances where time-based guidance is appropriate include the zero or effective lower bound (which is still nearby), and occasions when all other efforts by the Fed to move market expectations in line with its own policy intentions have failed (as was the case last fall, when “next meeting” had an immediate and powerful impact on market expectations). Some Fed officials have likened its uses on such occasions to those of a sledgehammer. While the Fed has clearly shifted to data-based guidance, the sledgehammer is no doubt still nearby if needed. If the current gap between FOMC participants’ rate projections and market expectations persists in the face of incoming data that validate the Fed’s economic projections, we may well see this tool being wielded again before too long. Forward guidance: Timeline of time-dependence vs data-dependence -5.0-4.0-3.0-2.0-1.00.01.02.03.04.05.0-5.0-4.0-3.0-2.0-1.00.01.02.03.04.05.09900010203040506070809101112131415ValuesValuesFOMC statements: form of forward guidanceData-basedTime-basedConsiderableperiodMeasured PaceExtended periodAt least throughmid-2013, etc.ThresholdsBalance of risksNext Source: FRB, Deutsche Bank Research 1 March 2016 Global Economic Perspectives: Fed forward guidance: beware the sledgehammer Page 2 Deutsche Bank Securities Inc. Key Economic Forecasts 2015F2016F2017F20152016F2017F2015F2016F2017F2015F2016F2017FUS2.41.32.20.11.31.9-2.4-2.9-3.2-2.4-2.9-2.9Japan0.5-0.30.50.80.21.83.34.64.5-4.2-4.2-3.5Euroland1.51.41.50.00.21.43.02.72.3-2.1-2.0-1.7 Germany1.71.71.60.10.31.68.27.87.50.50.00.0 France1.11.21.60.10.21.1-0.10.10.3-3.7-3.4-2.9 Italy0.81.10.90.10.21.42.11.71.6-2.6-2.8-2.4 Spain3.22.72.2-0.6-0.31.51.61.41.2-4.5-3.5-2.8UK2.22.32.30.01.11.9-4.3-3.1-3.0-4.0-2.5-1.0Sweden3.82.72.50.01.01.96.05.75.5-0.8-1.0-0.5Denmark1.61.71.80.51.41.87.57.06.5-3.0-2.5-2.0Norway1.41.42.22.22.42.37.57.06.57.57.06.5Poland3.63.53.5-0.9-0.41.2-0.2-0.7-0.7-2.9-2.9-2.7Hungary2.72.43.3-0.11.12.33.13.42.5-2.4-2.2-2.0Czech Republic4.32.63.20.31.01.71.61.20.8-1.9-1.4-1.2Australia2.32.93.11.51.92.2-4.3-4.5-4.3-2.4-2.4-2.2Canada1.31.82.51.11.82.3-3.5-2.9-1.8-0.2-0.2-0.1Asia (ex Japan)6.26.16.32.42.72.72.42.21.9-3.1-3.1-3.1 India7.57.57.84.95.34.7-1.0-1.3-1.6-3.9-3.8-3.7 China6.96.76.71.41.81.82.72.72.5-3.5-3.5-3.5Latin America-0.7-0.72.015.218.518.8-2.9-2.3-2.3-7.2-6.4-5.5 Brazil-3.9-3.50.89.08.86.8-3.2-1.7-1.8-10.3-8.9-7.6EMEA1.11.92.58.76.85.9-0.9-1.6-0.6-5.0-4.6-3.4 Russia-3.7-0.70.515.59.27.14.35.05.0-2.7-2.1-1.6G71.81.21.80.20.91.8Worlde3.13.03.63.33.74.0Real GDP % growthbCPI % growthcCurrent a/c % GDPdFiscal balance % GDP Forecasts: G7 quarterly GDP growth % qoq saar/annual: %yoyQ1 15Q2 15Q3 15Q4 15FQ1 16FQ2 16FQ3 16FQ4 16F2015F2016F2017FUS0.63.92.01.00.51.01.22.42.41.32.2Japan4.2-1.41.3-1.4-1.0-0.50.91.50.5-0.30.5Euroland2.21.61.21.11.31.41.71.81.51.41.5Germany1.61.61.11.11.71.21.91.71.71.71.6France2.90.01.31.41.41.21.62.01.11.21.6Italy1.61.10.70.41.31.31.40.90.81.10.9UK1.72.41.71.92.62.62.52.52.22.32.3Canada-0.7-0.32.31.31.72.02.33.01.31.82.5G71.42.21.70.70.81.01.52.21.81.21.8 a) Euroland forecasts as at the last forecast round on 19/02/16. Bold figures signal upward revisions, bold, underlined figures signal downward revisions. (b)GDP figures refer to
