Memo to CEOs: take Fed’s cue on forward guidance

The Federal Reserve's rate-setting committee omitted any "forward guidance" from its policy statement on June 17 following its first meeting with Kevin Warsh as chairman. Warsh said some on the Federal Open Market Committee didn't feel it was right for now while others "think as a general proposition forward guidance isn't the business we should be in." Forward guidance typically refers to the central bank and FOMC members using public communication about the likely path of short-term interest rates as a way to steer the economy. Curbing volatility is a weak, but common, rationale. Some studies have found that earnings accompanied by guidance lead to wilder share-price swings, while other academic researchers discovered the opposite. Either way, the downsides more than offset any perceived benefits. Efforts to meet circulated numbers can distract managers into slashing costs, postponing investment or repurchasing stock at the expense of more lasting goals. There's little compelling evidence that frequent earnings guidance lifts valuation multiples or improves shareholder returns, consultancy McKinsey said. A more useful, albeit riskier, approach is to steer somewhere further out on the horizon, setting three-to-five-year growth and return objectives. For now, however, it would simply be enough to follow the Fed and let investors find their own way. Some people just have a bad sense of direction, and many of them run big organizations. Federal Reserve Chair Kevin Warsh is conceding the limitations of publicly mapping out the near future. Corporate bosses, however, stubbornly keep trying to navigate investors around the next corner. They often wind up getting everyone lost. Warsh has stirred controversy by abandoning forward guidance. Fed economic forecasts already include warnings about being unreliable, and the central bank's misjudgment that post-pandemic inflation would be "transitory" is also telling. Warsh's predecessor, Jerome Powell, acknowledged, "The dots are not a great forecaster of future rate moves," referring to closely watched dot-plot charts of estimates from rate-setting committee members. Chief executives encounter similar problems anticipating what the next three months will bring. Tariffs, wars and climate-related catastrophes are just a few things that throw off financial results. Supply-chain snarls to marketing missteps and cyber-security attacks also ruin best-laid boardroom plans. Small wonder that despite managers expressing confidence about their profit projections, reported figures fell within the indicated range less than a third of the time, one recent study found. More C-suites are at least recognizing the folly. In 2010, around 36% of S&P 500 Index constituents were issuing quarterly earnings-per-share guidance, but last year only about 23% did, including athletic-wear maker Lululemon LULU.O, cloud computing provider Oracle ORCL.N and supermarket titan Walmart WMT.O, according to FCLTGlobal, a long-term investing initiative from money manager BlackRock and others. Costco Wholesale COST.O epitomizes less myopic financial success. The $400 billion retailer has thrived without giving guidance; its stock price is up more than 11,000% since its 1985 market debut. Berkshire Hathaway Chairman Warren Buffett and JPMorgan CEO Jamie Dimon urged an end to the practice, which should help comfort bosses worried about losing credibility or control of their company's messaging.

Memo to CEOs: take Fed’s cue on forward guidance

Context from the Fed

The case against frequent guidance

Fed's retreat from forward guidance sets an example

Why CEOs should be more cautious about earnings guidance

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