Central bank symposia and forward guidance

Why words became an instrument 

A central bank sets an overnight rate. Almost nothing in an economy is financed overnight. A mortgage, a corporate bond, a government's borrowing programme and an equity valuation are all priced off expectations of the average overnight rate over a much longer horizon, so the rate a central bank actually controls influences the economy only through what people expect it to be in future.

That is the whole reason guidance exists. If the path matters more than the level, then communicating the path is a way of affecting financial conditions without moving the current rate at all. The instrument became prominent when policy rates in several economies approached the practical floor below which they could not usefully be cut, leaving communication and balance sheet operations as the levers still available.

The three forms guidance takes 

• Open-ended, or qualitative. A statement that policy is expected to remain at a setting for some time, or for an extended period, with no condition attached. The vaguest form, and the easiest to abandon.
• Calendar-based, or time-contingent. A statement that a setting is expected to hold at least until a stated date. Precise and brittle: if conditions change before the date, the central bank must either break the guidance or hold a policy it no longer wants.
• State-contingent, or threshold-based. A statement that a setting will hold until a named economic variable reaches a named level. It ties the commitment to conditions rather than to time, and its weakness is that a threshold is not a trigger: reaching it is generally stated as a condition for considering a change, not for making one, and that distinction has caused repeated misreadings.

Each form trades clarity against flexibility, and the history of guidance is a history of that trade being renegotiated. Central banks that adopted precise formulations found themselves either constrained by them or visibly departing from them, and several have since moved toward describing their reaction function, meaning how they will respond to conditions, rather than committing to a path.

The problem at the centre of it 

Guidance is useful in proportion to how much it is believed, and it is believed in proportion to how costly it would be to break. That is a genuine problem rather than a rhetorical one, and economists call it time inconsistency: a commitment that is optimal to make today may not be optimal to keep tomorrow, and everyone knows this in advance, so the commitment is discounted at the moment it is made.

Central banks have responded by attaching guidance to conditions rather than dates, by stating explicitly that guidance is conditional, and by building reputation over time. None of those fully solves it. A commitment a central bank can lawfully abandon at its next meeting is not a contract, and the market's treatment of it as a probability rather than a promise is a correct reading rather than a cynical one.

There is also a second audience problem that guidance cannot solve. A formulation precise enough to be useful to a bond desk is frequently opaque to the households and firms whose spending and pricing decisions monetary policy is ultimately trying to influence. Several central banks now publish plain-language versions of their statements and conduct surveys of household inflation expectations for exactly this reason, and the research on whether the plain-language versions reach anybody is not encouraging. Communication designed for one audience being read by another is a recurring theme in the literature on this instrument.

The symposia and where framework changes appear 

Several recurring conferences sit on the calendar as speech events rather than as decision events, and they carry disproportionate weight because senior officials speak at them outside the constraints of a policy meeting.

• The annual economic policy symposium hosted each August by a regional Federal Reserve bank in Jackson Hole, Wyoming. It is an academic conference with a published theme and papers, attended by central bank governors from many countries, and several framework announcements and significant policy signals have been delivered in its opening address.
• The European Central Bank's annual forum on central banking, held each summer in Sintra, Portugal, with a comparable format and a panel of major central bank heads.
• The spring and annual meetings of the International Monetary Fund and the World Bank, at which finance ministers and governors speak and bilateral discussions occur alongside the formal programme.
• The Bank for International Settlements meetings in Basel, where central bank governors meet regularly and which produce published research rather than announcements.
• Parliamentary and congressional testimony, which is scheduled, is conducted under oath in some jurisdictions, and involves unscripted questioning that a press conference format does not.

Individual speeches by policymakers are also calendar entries, and their weight varies enormously by speaker: a governor's remarks and a regional official's remarks are read very differently, and a scheduled speech with a published title on monetary policy is read differently from remarks at a community event.

Blackout periods 

Most major central banks observe a quiet period before a policy meeting, during which officials and staff do not comment publicly on policy or the economic outlook. The window is typically about a week to ten days, is published, and is a self-imposed convention rather than a legal requirement in most jurisdictions.

The convention has two practical consequences. It creates a period in which no official communication arrives, so any information reaching a market during it comes from data or from press reporting rather than from the institution. And it makes the final speeches before a blackout begins carry additional weight, since they are the last scheduled communication before a decision.