You may or may not know much about forward guidance, but it has been of constant attention on the minds of policymakers. Further, policymakers themselves don’t seem to be able to define it, and because of it they can’t seem to solve the bond market puzzle. In orthodox economics, forward guidance is either “Delphic” or “Odyssean.” As usual, there is a great deal of needless complication associated with either, for everything must be turned into a regression model or else economists are lost in common sense.

Delphic forward guidance is of the kind practiced by central banks before the 2008 global break. Pioneered in New Zealand, the central bank plainly states what it is thinking about the state of the world and therefore what guides the expected path of monetary policy. The problem with the “Delphic” version is in the more extreme policy cases, as much of the world found out before the GFC was ever finished.

If the central bank, for example, believes that its policies will be effective and maybe sharply so, then Delphic forward guidance can potentially thwart the policy before it actually becomes effective. In other words, if bond market participants get wind of these positive central bank expectations, bonds may selloff in “reflation”, thus raising market rates before the “stimulus” of low rates has a chance of doing its work.

The prospective solution to this problem is “Odyssean” forward guidance. Here, the central bank may recognize the potential opposing problem of Delphic guidance and overcome it by promising to keep up with “stimulus” even if the effects of “stimulus” start to become apparent. This was very clearly practiced in 2013 by the Fed who unusually committed to QE3, which was then thought open ended, tying it to the unemployment rate so as to keep the bond market from anticipating too much its future success.

The problem, of course, with all forward guidance is that it is as much based on a single assumption that has actually been disproven over time, time and again, especially the past few years of the “rising dollar.” Economists can’t figure out why interest rates are lower today than when QE3 was unleashed, and in fact UST rates in particular declined more after the QE’s than with it. To try to rectify this philosophical ground with reality, as it relates to Odyssean versus Delphic forward guidance there has been raised (going back as far as 2012) an Event-Study Activity Puzzle to sort out interest rate effects.