Falling shadow rates, rising precious metals

Forward guidance by central banks appears to be garnering some criticism from journalists and analysts, claiming that shifting goal posts have left many confused.  But the evidence from markets is that central bank credibility remains firmly intact.

One marker for the effectiveness of current policy settings that is comparable to history is to look at "shadow" policy rates, which I've written about here.  This is a statistical derivation of what central bank controlled policy rates would be if they could be negative based on information from non-negative parts of the yield curve.

Interestingly, the Fed shadow rate has become increasingly negative in the last couple of months.  This is not really intended, as the FOMC haven't looked to ease policy.  In fact they probably see tapering of asset purchases as the reverse.

But the drop in the shadow rate over the last couple of months suggests the FOMCs credibility on its forward guidance remains firmly intact. This is despite protests from some parts about the problems with the unemployment rate threshold of 6.5%, which soon maybe reached.

These data are also available for the Bank of England's Bank Rate, which similarly remains very low.  It will be interesting to observe this statistic in the coming months, given explicit guidance on thresholds appears to have been replaced with a more vague promise on labour market conditions.

But so far, it doesn't appear that the better-than-expected improvement in economic growth and labour market conditions have moved the needle substantially when it comes to shadow rates.

To be sure, BoE Governor Carney stated in December that "The strength of the UK and the fall in the unemployment rate suggest that the equilibrium real interest rate is now rising towards zero." The shadow rate would suggest current policy is much more accommodative than this.

The drop in shadow rates has accompanied a rise in precious metals prices, which have again risen today without too much happening in other markets.

Its also notable that gold has outperformed in the precious metals space against a more industrial metals like platinum.

It seem like gold is outperforming on the expectation that weak economic data is increasing the risk that the FOMC changes tack on current policy.  But if the shadow rate is to be believed, it would appear that bond markets are already suggesting that there has been a sizeable move in effective policy rates.