Pursuit of unconventional monetary policy may be in the market's hands

Don't fight the Fed was once a maxim for investors to live by and shorthand for the unwritten rule that when the world's major central banks demanded that markets jump, the only response was "How high?"

But the pursuit of unconventional monetary policy - and, more recently, forward guidance - designed to shore up market confidence in the wake of the global financial crisis may not simply have dulled the power of the central banks but effectively transferred it to the markets.

That is the conclusion of a provocative new paper from the Bank for International Settlements, the central bankers' bank.

In an article entitled "Forward guidance at the zero lower bound", economists Andrew Filardo and Boris Hofmann throw the perils of forward guidance policies - communicating that interest rates will remain low for longer than is priced into markets - into sharp relief.

They warn such policies "can indirectly create financial stability risks if monetary policy becomes increasingly concerned about adverse market reactions", possibly resulting in "an undue delay in the speed of policy normalisation and the risk of an unhealthy accumulation of financial imbalances".