Feb 11 (Reuters) – Key central banks appear to be down to
their last tool: making promises.
Unfortunately these promises – “forward guidance” in banker
parlance – are ones they appear unable to honor for more than a
few months, and ones that investors demonstrably didn’t believe
while they lasted.
Both the Federal Reserve and the Bank of England are likely
to provide updated or clarified forward guidance this week,
painting a new and presumably more believable picture of what
they will do about interest rates under what circumstances.
The BOE should give new information about forward guidance
as part of its Inflation Report to be issued on Wednesday, while
many investors expect Fed chair Janet Yellen to expand on
forward guidance when she testifies before Congress.
With interest rates close to zero, central bankers have
limited levers with which to move the economy one way or
another. Quantitative easing – buying bonds or other assets – is
one option, but there are good reasons to believe that while it
ratchets up values in financial markets, it does so at the risk
of causing dislocations and with uncertain benefit to the actual