The code, it's more what you call guidelines, than actual rules

         Thursday's rate decisions by the Bank of England and ECB provided no new sparks or additional pieces of information around timing of either rate rises in the UK or further stimulus in the eurozone. It didn't however stop speculation being rife about whether Mark Carney had actually set his forward guidance levels too conservatively. Debate raged on CNBC, Bloomberg and between analysts over whether Mark Carney was either going to have to raise interest rates later this year, sooner than expected, or make, in their words, 'an embarrassing about turn', and drastically reduce the level of unemployment he has set as the barrier level.

         Any regular readers of my articles will be familiar with the fact that I have been a fan of forward guidance in both the US and UK so far. Unfortunately I think it is in the most basic concept that many of these analysts panicking over an earlier rate rise, either in the UK or the US, are missing. The hint for me is in the name - forward guidance. Guidance isn't hard fast rules which must be followed.  

          I find it amusing that often the best way to explain analysts' current reaction to serious issues, and how they should be dealing with it, is by referencing the relationship of the Fed/BoE to the market as being akin to a parent child relationship. There are many analysts out there who seemingly hear the projections and the levels mentioned by the central banks and take them as being hard code, as rules. Parenting, not that I have much experience in such I may add, often requires the parent to guide their child in the right direction. Providing guidance to someone is more about pointing them in the right direction to help them get to where they want to be (or in some cases where you want them to be).

The real purpose, in my opinion, of the projections and guidance is, whilst trying to give a best estimation of where and when the central bank sees the economy as being, it is merely an indication. Whilst giving these indications and informing the markets of the sort of levels they view as being important to their interest rate decisions, they are hoping to 'guide' the market to realise that they are considering raising rates in the future, but only when the economy is able to handle it. The guidelines which they have mentioned (7% unemployment and inflation around the 2-2.5% mark in the UK, 6.5% unemployment and 2% inflation rate in the US) are indicators. If unemployment performs better than expected, like it currently is doing, but all else appears to remain the same, it becomes acceptable for the central bank to adjust their guidance levels of unemployment to an even lower level as a target and trigger for a potential rate rise. The Fed even says as such on it's own website:

"Neither the unemployment rate threshold nor the inflation threshold should be viewed as triggers that would automatically lead to the immediate withdrawal of accommodative policy. Policymakers recognize that no single indicator provides a complete assessment of labor market conditions or the outlook for inflation. In addition, when the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent"

The Bank of England has given similar statements in relation to it's own forward guidance. 

It seems remarkable that the same analysts at various banks (or on TV), who are continually readjusting their own projections and predictions, feel the need to criticise the central banks for the possibility they may need to adjust their own projections or guidance. In last week's article I assessed how the vast majority of analysts were predicting equity markets to go up further this year. What is the likelihood that the Citibank analyst who predicted the FTSE 100 to hit 8,000 or the JP Morgan analyst who predicted the S&P 500 to hit 2,000 in 2014 will turn round and admit they were wrong if it doesn't? The chances are that they will brush it under the carpet and, if the information available starts to change, they will adjust their predictions throughout the year to reflect the new reality. When we look at the central banks we need to accept they too are making predictions about the future, which is their current best assessment of the situation, and this may be done in a way to guide market rates and assets to where they need them to be. 

          Anyone familiar with Pirates of the Caribbean will know about the Pirate code. As Captain Barbossa, explains to Keira Knightly, "the code, it's more what you call guidelines, than actual rules". This is the theme throughout the films. So too with forward guidance, It's more what you call guidelines, than actual rules. They've managed those guidelines well so far and from those guidelines it seems the base rate isn't going anywhere. Certainly not until enough parts of the economy are showing true recovery, not just unemployment.