Macroscope | Fed and BOE have lost their way on forward guidance and are flying blind

In recent years, major central banks such as the United States Federal Reserve and the Bank of England have relied on forward guidance as their main tool for getting the message across to markets on where they see - and want - future interest rate levels.

By guiding rational expectations on future rate moves, it is supposed to spare markets needless worry over volatile rate movements. Uncertainty on interest rates can be bad news for exchange rate stability, financial market performance and economic well-being.

Forward guidance is supposed to build confidence, not wreck it. But in recent months, the Fed and the BOE seem to have lost their bearings and have struggled to emerge from the monetary maze of zero rates and unprecedented balance sheet explosion following quantitative easing programmes with any meaningful sense of direction.

Gut instincts have long been begging both banks to begin the long road back to monetary normality. But they have been bogged down by conflicting data, global stability concerns and, at times, deep-rooted indecision. The mixed messages picked up by the markets have made matters worse.

Both banks have failed to grasp the nettle with clearer determination one way or the other. It has left a policy vacuum and made it tougher for consumers, businesses and markets to make credible spending and investment decisions.

Back in the summer, the BOE hinted that higher rates were on the way by the turn of the year, while the Fed had been leading the markets to believe that a September rate rise had been on the cards. Now, the BOE seems to be shying away from an early 2016 rate rise, while the Fed is leaning more to a rise next month.