Market provide the best forward guidance

Financial journalists had plenty to comment on Thursday morning, post the FOMC meeting and the Chancellors budget the day before. Despite one meeting addressing fiscal issues and the other monetary policy, one thing both meetings had in common was offering a fairly cautious view of the global economy.  Despite this cautious outlook stock prices rose, as this outlook bode well for lower rates for longer.


In the budget George Osborne did offer some incentives for savers and investors. Lowering corporation tax, reducing capital gains tax, and further incentives to make use of ISA’s increasing the allowance to £20000. The move to lower capital gains tax only applies to shares, buy to let land lords will not benefit. This must be seen as another move to take the heat from the property market by the chancellor and encourage savers into the equity market.


The Office for Budget Responsibility lowered economic growth forecasts for the UK economy for every year until 2020. As they often fail, like most economists, to get one quarter right, the likelihood they get 3 or 4 years hence right seems remote.


The Federal Reserve left rates where they were, as was expected. We speculated ahead of US rate announcement that the Federal Reserve’s message will be a Goldilocks’ one. Not describing the economy too hot, and spook bond markets, nor too cold and spook equity markets.


On the outlook for rates the Open Market Committee did fall in line with market expectations, pulling back from the forecast four rate hikes this year to two. The US remains about the only economy in the world that is currently looking to tighten monetary policy this year.  


Janet Yellen appeared to offer a picture of an economy continuing to expand at a gentle pace, referring to falling unemployment, and inflation picking up at a modest pace. Her caution seemed to come from concerns for the global economy overall, citing China as an example. The other causes for concern included falling commodity prices and volatile markets.


We have made this statement before but why central bankers make such a point of forward guidance? If equities rally in the next quarter the US economy continues to recover and we get a couple of months of stronger china economic data, will the Federal Reserve try and go back to four moves this year.


The market will make its own mind up as to the path of rates, as was the case earlier in the year.  With the lack of ability to forecast the path of economic growth, trying to provide forward guidance just makes central bankers  a hostage to fortune. 

Posted on March 18, 2016 .