The Drawbacks of Forward Guidance

The problem for the Fed and other central banks lies not in monetary accommodation, but in their communication strategies. Indeed, investors appeared less concerned about understanding the real economic story than about the Fed’s response to it.

BERLIN – The nomination of Janet Yellen to succeed Ben Bernanke as Chair of the US Federal Reserve comes at one of the riskiest moments in the recent history of the Fed. The Fed’s announcement in May that it might start tapering its long-term asset purchases surprised many central bankers, and triggered a sell-off from markets worldwide. But some of the good news about America’s economy was bad news for financial markets, because investors considered the Fed’s potential policy tightening in response to such news to be more relevant than the news itself.