For the first 70 years of the automobile, cars had no seatbelts. Nash Motors offered lap belts in 1949 but buyers rejected it, and governments looked away till it was made mandatory in the US in 1968. The logic was, “We always managed without it.” That logic was never defeated by argument. It was defeated by the body count.
The saga merits attention. This week, the world’s most powerful central bankers gathered at the ECB Forum at Sintra in Portugal. Forward guidance—signalling the path of interest rates—was given a joint burial by the central banks of the US, Europe, Britain and Canada. ECB’s Christine Lagarde even offered the eulogy regretting she felt “bound and compelled” by it. Kevin Warsh, the new Fed chair, declared “common cause” with his mantra: no forward guidance. India’s RBI, notably, has not yet boarded the silence wagon—suffice to say silence is not an indulgence developing economies can afford.
Alan Greenspan practised ambiguity; Sintra has proclaimed it. The timing is an indictment. Earlier this week, a Bank for International Settlements report named the AI investment boom a threat to financial stability. It warns that repricing caused by higher rates or an AI bust could be as disruptive as the crisis of 2008. Paradoxically, researchers warn of a crisis-scale correction; the principals respond by switching off the lights.
The risks are not hypothetical. The largest hyperscalers are pouring over a trillion dollars on AI infrastructure. The gap between available cash and need is bridged with debt, much of it in off-balance-sheet vehicles tied to insurers and banks. Add circularity and deals so opaque that the same asset risks being pledged twice. The bankers know it— Bank of England’s Andrew Bailey catalogued the leverage on stage; Bank of Canada’s Tiff Macklem warned of a painful correction.
What Sintra withdrew was the word map. The case for silence is that the world managed without guidance in the past. It is true that till 1994, the Federal Reserve didn’t disclose the Funds Rate, even litigated in 1976 to deny disclosure and ended the release of minutes. Rate announcement began in February 1994—at the very meeting that detonated the $1.5-trillion bond massacre. The market could not navigate the surprise tightening and the resultant crash entrenched what the courtroom could not compel. The bond market got its seatbelts the way cars got theirs—after the crash. Forward guidance arrived a decade later.
Today’s market is not the one Greenspan mumbled at and nudged. It is driven by sentiment engines, by algorithms trading in milliseconds. The reality was flagged by Bailey at Sintra. Under the circumstances, hyper-volatility is a given. Warsh, however, asserted that “volatility is not up, it’s down” since forward guidance was dumped. Fact is, two-year bond yields jumped 15 basis points; Dow hit a high and then shed 1,151 points in two days. Semiconductors plunged 6.5 percent in a session, the US dollar hit a 40-year high against the yen and the rupee fell despite RBI’s new wall against free-kicks. Volatility has not fallen, but migrated.
The no-guidance thesis does not survive its own logic. Warsh & Co say markets freed of guidance will price data independently. The question is whether central banks will treat this as uncontaminated information or an instrument of affirmation. Without a published reaction function, every decision can be retro-fitted as data-consistent. The abolition of guidance is, effectively, the abolition of the audit trail.
The dodge of Sintra triggers an existential question. Central bankers have repeatedly stated they will not comment on deficits, tariffs or fiscal expenditure of governments that drive inflation more than any output gap. Now they will not disclose views or intentions on inflation or rates either.
Consider the context: governments define fiscal expenditure, consumers define consumption levels and markets price risk. If the central bank offshores pricing to markets, renounces both commentary and prophecy, what justifies its place at the pulpit?
Yes, they will determine policy rates. The policy rate, though, only touches overnight money. That which matters—mortgages, bonds, the yen, the rupee—are priced on the expected path of policy. Expectations are not a fashionable accessory in debates; they are the driver of transmission. Transparency about the present and silence about the future is not a policy, but a perilous contradiction.
Greenspan wrote in Ayn Rand’s newsletter in 1966: “Deficit spending is simply a scheme for the confiscation of wealth.” He then ditched Rand at the altar of alternative monetary theories and read vows with the market to practise discretionary pricing. The strategy was scaffolded by overt incoherence and covert action—the market rescues for 1987, LTCM collapse, dot-com burst. The Fed Put was actually born as the Greenspan Put. The belief was Greenspan would step in to save markets. The halo was wrecked by the confession before the US Congress in 2008 that he “found a flaw in the model”, the ideology that markets discipline themselves.
Warsh is Greenspan’s heir in method—constructed ambiguity, distrust of official data and faith that markets deprived of guidance grow up. The challenge to this belief is right around the corner—concentration risk in tech stock valuations, opacity of private credit bubbling into redemption gates, profligacy of governments. The central banks may not see it, but the Sintra consensus consecrated a church that abolished sermons to assume infallibility.
Forward guidance was the three-point belt central banking invented after its own crash of 1994. At Sintra, the belt was unbuckled. Seventy years of motoring swore seatbelts were unnecessary—right up to the windshield. Markets are now asked to ride the fastest vehicle finance has ever built on the same assurance.
Read all columns by Shankkar Aiyar
The Third Eye / Shankkar Aiyar
Author of The Gated Republic, Aadhaar: A Biometric History of India’s 12 Digit Revolution, and Accidental India
(shankkar.aiyar@gmail.com)
