Futures contract

• communication by a central bank about the likely future path of interest rates, usually reduces uncertainty.
• But it matters how this is done in practice, because forward guidance with a short time horizon can raise uncertainty.
• This occurs if the forward guidance impairs the aggregation of private information in financial markets, thus making market prices less informative.
• Central banks often make statements about the likely future path of interest rates by providing so-called forward guidance.
• [2] Via forward guidance, central banks provide additional information regarding their likely response to economic developments, which can anchor expectations about future policy rates and reduce uncertainty.

The type of forward guidance matters

• Forward guidance can be implemented in different ways. Three types of guidance have been dominant in the recent past:
  1. Open-ended forward guidance is a purely qualitative statement about the policy path. An example is the ECB’s statement used between July 2013 and January 2016 that “we expect the key ECB interest rates to remain at present or lower levels for an extended period of time.”
  2. Data-based forward guidance outlines a policy path conditional on economic outcomes. The ECB’s current forward guidance, for example, contains such an element, as the key policy rates are expected to remain at their present levels “for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.”
  3. Calendar-based forward guidance is a policy path with an explicit reference to a calendar date. An example is the current guidance by the ECB, that key policy rates are expected to remain at their present levels “at least through the first half of 2020.”
  • The ECB examples show that central banks have used different types of forward guidance over time sometimes in combination.
  • Understanding the differences between the different types of forward guidance is important to optimise its use in the future.
  • As forward guidance provides market participants with more precise information on the likely future path of interest rates, we would expect that market interest rates are less responsive to macroeconomic news than in the absence of forward guidance, and that disagreement across forecasters is reduced.
  • Open-ended forward guidance has no noticeable effect: government bond yields respond to news in a similar way as in times without forward guidance (marked by the vertical red line).
  • However, the results for calendar-based forward guidance with a short horizon are surprising: the responsiveness is amplified substantially, suggesting that in these cases markets perceive a large degree of uncertainty about where interest rates will be heading, larger even than in the absence of forward guidance.
  • In Figure 2 below, there is again no discernible effect under open-ended forward guidance, whereas disagreement is roughly halved in the presence of data-based forward guidance.
  • As with the responsiveness of government bond yields, calendar-based forward guidance with a long horizon exerts the strongest effect disagreement is effectively eliminated.
  • Calendar-based forward guidance with a short horizon, however, does not reduce disagreement.

How can forward guidance increase uncertainty?

• The model developed in our paper explains the counter-intuitive increase in uncertainty under some types of forward guidance.
• In this setting, forward guidance has two opposing effects on agents uncertainty about future interest rates, which affect the sensitivity of government bond yields to macroeconomic news as well as forecaster disagreement.
• Therefore, while forward guidance directly decreases uncertainty, it makes prices less informative so that, overall, uncertainty can increase.
• In Figures 1 and 2, calendar-based forward guidance over short horizons can be viewed as a weaker form of guidance than calendar-based forward guidance over long horizons.
• Furthermore, weak forward guidance is shown to have only minor effects on the extent of disagreement across economic agents only if forward guidance strengthens sufficiently, does disagreement drop noticeably.
• Figure 3 The effect of forward guidance in a model where agents learn from market prices

Concluding remarks

• Forward guidance can provide additional accommodation when policy rates are at the effective lower bound, and also reduce uncertainty.
• This Research Bulletin article suggests that the way forward guidance is implemented matters for its effect on uncertainty.
• For instance, weak forms of forward guidance, by making market prices less informative, can potentially increase uncertainty.

References

• DUBAI, July 29, 2019 /PRNewswire-PRWeb/ --BTSE, the multi-currency spot and futures trading platform, has announced the addition of spot trading support for Litecoin (LTC) on its platform starting on July 29th, 2019.
• BTSE is the only exchange that offers a single order book for spot trading.
• Upon sign-up, BTSE users are able to pick their spot trading currency of choice by depositing fiat or cryptocurrencies into their account.
• BTSE is a multi-currency spot and futures trading platform custom-built and designed to bring efficiency and stability to the cryptocurrency trading landscape today.

• ICEs new futures contracts expand the existing suite of Marine Fuel contracts launched in February 2019 and will settle against the S&P Global Platts physical Marine Fuel 0.5% assessments.
• The new contracts are as follows:
  Were seeing rapidly growing demand for our Marine Fuel futures contracts and increasing liquidity as market participants use these contracts to manage their price exposure in advance of IMO 2020, said Jeff Barbuto, Vice President of Oil Markets at ICE.
• These new contracts include Marine Fuel mini-contracts which will help shipping companies looking for smaller-size contracts to manage their risk.
• Blending and refining spreads can be hedged using the newly listed differential contracts based on the price difference between Gasoil and Marine Fuel.

• LONDON, July 25, 2019 /PRNewswire/ -- CME Group , the world's leading and most diverse derivatives marketplace, today announced the launch of Black Sea Sunflower Oil Financially Settled (Platts) futures (based on Sunflower Oil FOB Black Sea Ukraine), to begin trading on August 26, 2019, pending all relevant regulatory review periods.
• "The addition of Black Sea Sunflower Oil to our Soybean Oil and Malaysian Crude Palm Oil futures contracts makes CME the global destination of choice for customers hedging and risk management needs in the edible oil markets."
• Black Sea Sunflower Oil Financially Settled (Platts) futures will be financially settled based on the "Sunflower Oil FOB Black Sea Ukraine" price assessment published by S&P Global Platts each business day.
• For more information on CME Group's Black Sea products, including Black Sea Sunflower Oil Financially Settled (Platts)futures, please visit: www.cmegroup.com/blacksea .