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Ex-FPC member criticises central banks’ forward guidance

Former Financial Policy Committee member Robert Jenkins says forward guidance from central banks is not helpful in the current economic environment.

Speaking at the Hermes Prism Break Investment Conference today, Jenkins said forward guidance was only helpful mid-recession, which had now passed.

Jenkins’ comments come after a summer which saw both Bank of England governor Mark Carney and Federal Reserve chairman Ben Bernanke give forward guidance on the future of their respective financial policies and, more specifically, what conditions would be needed to taper quantitative easing programmes.

Jenkins said: “Forward guidance did work when we were staring into the depths of recession. The issue is that times are different.

“There are four things central bankers worry about; inflation, the economy, financial stability and political interference.

“All four factors favoured aggressive easing between 2008 and 2012. Growth was a distant dream and elected officials welcomed any measures. We are now in a time where all four factors pull in different directions.”

Jenkins criticised Carney’s forward guidance for its use of caveats and ‘knockouts’. Carney announced that monetary would stay unchanged until unemployment in the UK reached seven per cent.

Jenkins does not think this sends the right message and believes markets want certainty, instead of clarity in the current environment.

Jenkins said: “By saying central bankers will not even consider acting until certain targets are reached, they are really saying that they are prepared to be late to removing the punchbowl.”



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