Why Investors Shouldn't Follow Fed's Forward Misguidance

In recent years, one hip thing many economic thinkers hype is central bankers' forward guidance—attempts to substitute language for action to influence interest rates and, thereby, stimulate economic activity. From their pledges to keep rates “lower for longer” or take “symmetrical views of inflation targets,”[i] we are supposed to believe rates will stay low, inflation expectations will rise and borrowers will borrow. Funny thing is, several recent central bank studies show folks are, overall and on average, not getting the message. Even if they are, the theory underpinning this approach seems flawed. To us, exploring this disconnect illustrates yet more reasons investors shouldn't focus on the Fed.