When’s the last time you’ve heard anything about the sovereign debt crisis?
We’ve seen more activity in a tortoise than we’ve seen in Europe of late. Maybe Vladimir Putin needs to invade Europe just to see if the cultured continent is still functioning.
Europe, though, has been quietly going about its business in much the same way as the U.S. Bond yields have been at record lows and stock prices have been near record highs across the continent. But, as in the U.S., just because the market is performing well, it doesn’t mean the economy is performing well.
The jobless rate in Greece is 26.7% and Spain is not far behind at 25.3%. Overall, unemployment is at 11.8%. In comparison, the U.S. rate is 6.3% … although the U-6 rate remains at 12.3%.
Forward Guidance in Europe
Seemingly, the difference between Europe’s approach and the U.S. approach has been Europe’s reliance on forward guidance, which to date has propped up Europe’s markets.
There was talk about relying on forward guidance in the U.S. last year, but instead the Federal Reserve Board continued to buy bonds. Talk about forward guidance is ironic, given that forward guidance is simply the act of talking … saying what you expect to do without actually doing much of anything.
Consider this definition: “Through ‘forward guidance,’ the Federal Open Market Committee provides an indication to households, businesses, and investors about the stance of monetary policy expected to prevail in the future. By providing information about how long the Committee expects to keep the target for the federal funds rate exceptionally low, the forward guidance language can put downward pressure on longer-term interest rates and thereby lower the cost of credit for households and businesses, and also help improve broader financial conditions.”
It sounds a lot like the approach the U.S. and Europe are taking to Russia’s invasion of Ukraine. And you’d think it would have the same effect. How long can talking about doing something and doing nothing actually work?
It’s worked in Europe, but maybe Mario Draghi, who heads the European Central Bank, is a better talker than former and current Fed heads Ben Bernanke and Janet Yellen.
Now, though, Draghi has said action will be taken in June. As Zerohedge put it:
“After nearly two years of playing the market like a fiddle with nothing more than verbal intervention, Draghi was finally cornered today when during the ECB press conference earlier he explicitly stated that ‘the Council is comfortable with acting in June.’ Just that statement alone was enough to push the EURUSD lower by 150 pips from just shy of 1.40 to 1.3850.”
The ECB now must take action to remain credible, but the action is expected to be minimal. When a tortoise finally moves after staying still for a long period, even a small movement seems significant.
Forward Guidance in the U.S.
If the ECB acts and the Fed continues to unwind its bond buying, we may be seeing a role reversal.
The Fed has said it will continue to keep interest rates low. Which raises the question: If the Fed needed to buy bonds to lower interest rates, how can it keep rates low if it stops buying bonds?
We may soon find out whether forward guidance in the U.S. works as well as it has for the ECB or if it works as well as it has to stop Russia in Ukraine.