* Forward guidance poses headache for central banks
* Central bank guidance holds limited sway over markets
* ECB's Draghi faces guidance balancing act on Thursday
* U.S. data could confirm consensus on Fed's September taper
By Andy Bruce
LONDON, Sept 1 Central bank bosses in Europe and
the United States have had a tough time trying to budge market
expectations for monetary policy back into line with their own
plans, as this week will again show.
Forward guidance - making plans for monetary policy in the
months and years ahead explicit - was adopted in July by the
European Central Bank and the Bank of England in August,
following the U.S. Federal Reserve's example.
But it has already caused a problem of communication for
policymakers, just as major Western economies are showing more
signs of life.
As in the past, they must acknowledge the improvement to
foster growing confidence among the public and investors.
But the addition of forward guidance has coincided with -
and some economists say helped cause - an unwanted increase in
market expectations that point to interest rises before central
banks currently intend.
So while talking up the economy to the public, policymakers
have at the same time been reminding markets the recovery is
still too fragile to warrant these rate hike expectations.
That delicate balancing act falls to European Central Bank
President Mario Draghi at this Thursday's policy meeting.
Last week, his British counterpart Mark Carney tackled it by
warning the Bank of England could provide more stimulus for the
economy if markets get ahead of themselves and threaten to choke
off its recovery.
And while Draghi and Carney can try to steer expectations in
their own markets, their success or failure depends on events
elsewhere, in particular how the Fed chooses to act.
"The overwhelming issue is what the Federal Reserve does,"
said Bronwyn Curtis, head of global research at HSBC, who points
out central banks have limited influence over long-term interest
rates, for instance 10-year government bond yields.
"(The Bank of England) and the ECB would like to think it's
what they do that sets long-term rates. It isn't really, those
rates are just deferential to the U.S."
A raft of U.S. business and sentiment surveys due this week,
if positive in tone, would suggest the Fed is on track to cut
its buying of $85 billion a month in Treasuries and
First and foremost, Friday's monthly job report, if strong,
will reinforce the view the Fed will opt to decrease its bond
purchases at its Sept. 17-18 meeting. The reverse also applies.
Economists polled by Reuters forecast domestic employers
likely hired 180,000 workers in August, more than 162,000 in
July, while the jobless rate held steady at 7.4 percent, which
is a four-year low.
In Europe, focus will be on exactly how ECB President Draghi
words his latest forward guidance, especially since more signs
have emerged that the euro zone economy is gradually improving.
"On the one hand, recent growth news justifies a slightly
more constructive tone compared to the August meeting," wrote
Marco Valli, chief euro zone economist at UniCredit.
"On the other hand, Draghi will need to retain an easing
bias consistent with the forward guidance outlined in July, in
order to try to bring money market expectations more in line
with the ECB's own assessment of economic fundamentals."
One way the ECB might yet bolster its forward guidance would
through the publication of the minutes from its policy meetings.
Unlike the Fed and BoE, the ECB keeps its minutes secret and
locked up for 30 years. Draghi said in July he wanted to start
publishing them, although it is not clear when that will
Both the BoE and ECB are expected to leave policy on hold on
While the power of forward guidance to sway markets in the
direction central banks would like is open to question, there is
some evidence to suggest it might be working on the public, at
least in Britain's case.
Victoria Clarke, economist at Investec in London, pointed to
a Markit survey showing the number of households expecting the
BoE to raise interest rates within the next two years fell to 40
percent in August compared with 53 percent in July.
Greater certainty among the public that the Bank will hold
rates could form a solid basis to help the recovery spread.
"Via an anchoring in public rate expectations, the governor
could reinforce the UK's recovery by lifting incentives to spend
and invest, lifting domestic demand," she said.