The Dallas Fed’s Richard Fisher at the Asia Society
Fisher spoke at the Asia Society in Hong Kong on Friday, April 4, about “forward guidance” in monetary policy, which he described as “the subject du jour of central bankers.” It recently became a focus of discussion again in the U.S. after the Fed’s March FOMC meeting, when the Fed decided to go with “qualitative” rather than “quantitative” guidance regarding its future monetary policy statements. In this article, we’ll discuss Fisher’s take on Delphic forward guidance.
What is Delphic forward guidance?
According to Fisher, Delphic forward guidance is more obscure and enigmatic. It amounts to saying, “Here’s what we think we’re going to want to do if the economy evolves as we currently expect.” It’s vaguer in form than Odyssean guidance and provides an inkling of the Fed’s view on policy without making even contingent promises.
Delphic guidance in current the FOMC statement
On the pace of the taper
“If incoming information broadly supports the committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the committee will likely reduce the pace of asset purchases in further measured steps.”
On the timing of rate hikes for the Fed funds rate
“The committee continues to anticipate… that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends.”
On the post-liftoff path of the Fed funds rate
“The committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the committee views as normal in the longer run.”
While the FOMC may differ on the timing of the base rate lift-off, interest rate increases in the short-to-medium term seem certain. Investors can benefit from rising rates by investing in floating-rate fixed income ETFs like the VanEck Vectors Investment Grade Floating Rate ETF (FLTR), the SPDR Barclays Cap Investment Grade Floating Rate ETF (FLRN), and the iShares Floating Rate Bond (FLOT) ETF. Inverse bond funds like the ProShares Short 7–10 Year Treasury Fund (TBX) and the Barclays iPath US Treasury 10-Year Bear ETN (DTYS) are also a good option. Inverse bond ETFs provide the inverse return of the underlying benchmark index.
Richard Fisher’s take on favoring Delphic versus Odyssean guidance
- Due to the shift in economic inter-relationships following the worst downturn after the Great Depression, quantitative guideposts may be misplaced.
- Quantitative guidance, in providing time-based commitments, tends to remove all uncertainty and volatility from financial markets—a factor Fisher says could lead to complacency. It could also, perversely, cause markets to overshoot instead of becoming more stable.
For more on Fisher’s views on market volatility, read the Market Realist series Why Richard Fisher thinks volatility can be good for investors.
To learn more about how Delphic and Odyssean forward guidance has impacted both stock and fixed income investors in March, move on to Part 9 of this series.