MNI INTERVIEW: Forward Guidance Key Tool However It is Called

Forward guidance is a powerful tool for central banks however they like to define it, a U.S. academic whose methodology has been adopted by the Bank of England told MNI.

BOE research drawing on Eric Swanson’s methods has highlighted the significance of forward-looking language in monetary policy statements, and is likely to reinforce caution at the Bank over any change to language in its current statement referencing the possibility of further interest rate hikes. The finding came despite scepticism over the use of forward guidance as a definitive guide to the short-term rate outlook expressed by the BOE’s Chief Economist Huw Pill.

"Forward guidance has always been pretty potent," Swanson said in an interview.

PILL SCEPTICAL

While Pill in a July 2022 speech pointed to the difficulty of condensing the varying views on the Monetary Policy Committee into reliable guidance, Swanson’s research assesses the impact of changes to statement language which affect the mid-part of the yield curve. In contrast, changes in central bank policy rates primarily affect the short end, while quantitative easing moves the long-end.

"If you had come to me with an FOMC statement and asked me 'What's the forward guidance component of that?' using our definition, our methods, we can't answer that question ex-ante," he told MNI.

The BOE’s research, following Swanson’s lead, found that Monetary Policy Committee communication around announcements had more impact on markets than press conferences by Governor Andrew Bailey. This power of BOE guidance relative to the muted impact of comments by the governor stands in marked contrast to the situation in the U.S., Swanson noted.

"In the U.S. it's really the chair that seems to matter a lot,” Swanson said in an interview, noting the institutional differences between the Fed and the BOE, where the governor is sometimes outvoted by other members of the Monetary Policy Committee. “The Fed chair has never been on the losing side of a vote.”

NO ADDITIONAL INFORMATION AT PRESS CONFERENCES

The BOE researchers, Robin Braun, Silvian Miranda-Agrippino and Tuli Saha, found that over their full data sample that "there does not seem to be additional information released during the MPR (Monetary Policy Report) press conference," which is hosted by the Governor.

Swanson first co-authored a paper on forward guidance in 2005, after the Fed began using the tool in the early 2000s with considerable effect, with just a few words in a post-meeting statement having a bigger impact on Treasury yields than any other measurable policy component.

"Some of the movements in the medium (term) rates are due to the Bank Rate or the Fed Funds Rate change. And so our definition of forward guidance nets out anything that can be attributed to the short end, the policy rate change,” Swanson added. “In the U.S. the Fed Chair speeches are more important than the FOMC announcements themselves for medium-term interest rates, for long-term interest rates.”