The end of forward guidance ?

The FED is heading into its second Federal Open Market Committee meeting since Kevin Warsh took office on May 22nd. Thanks to the forward guidance of former Chairman Powell, markets used to absorb anticipated FOMC decisions well in advance. However, can we rely on the same degree of market efficiency going forward?

I use a rudimentary tool to anticipate central bank decisions several days ahead, simply by calculating the premium at which term OIS swaps trade above the official benchmark rate (see Fig. 1). This indicator typically starts picking up signal 20-30 days ahead of the meeting date. So far, it has proven reliable not only for USD but also for other G10 currencies.

At the last meeting (June 17th), the Fed dropped forward guidance altogether, officially ending one era. With one week remaining until the upcoming meeting on July 28th, markets are pricing-in no change to the policy rates. In a few days, we'll see whether the market has it right - or whether Warsh has a surprise coming.