The failure of forward guidance or what should we expect

 

Analysts are calling it a failure of the Fed's new forward guidance policy. The policy, of course, is no forward guidance. Given Fed Chairman Warsh is not going to tell the market much about the intention of Fed policy other than "it will not waver" from trying to fight inflation, the market will have to decide on the efficacy of current policy. The Fed, instead of driving policy, can now learn what the markets are discounting. The market is now providing information to the Fed instead of the Fed trying to manipulate the direction of rates. 

Prices and markets are acting as signals, not as something that is controlled by central bank guidance. Now, the Fed and the market may not like the signal,  but they are signals nevertheless. The signals are now very clear. The market does not believe that the Fed can control inflation, especially over the longer run. Long rates are reaching year highs, and the yield curve is steepening. This signal, especially with the increase in real rates, is tightening the credit markets. 

The bond markets are now once again a signaling market. There will be more uncertainty in these markets, but they are now telling the Fed what they think about policy, both monetary and fiscal. You may not like what the markets is telling us, but the message is clear.