SYDNEY (MarketWatch) — A paucity of policy options has increased central banks’ reliance on so-called forward guidance, where policy makers telegraph likely future actions.

There are two components to forward guidance. First, it communicates clear policies to which the central bank is committed. Second, the commitment is over a medium- to long time horizon.

But forward guidance suffers from a number of weaknesses.

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First, a focus on any single or a narrowly based set of indicators is problematic. The Federal Reserve’s commitment to accommodative monetary policy, for example, was based on a target unemployment rate.

A single indicator such as unemployment is not meaningful. It can be affected by participation rates or the definition of employment. Levels can be affected by unexpected disruptions including a government shutdown, strikes or natural catastrophes. What is relevant is the nature of employment, such as part- or full-time, and the type of job or income levels. The composition of unemployment, temporary or long-term, age and skill levels of the unemployed, also may be pertinent.

In Japan, meanwhile, the Bank of Japan’s policy targets 2% inflation. It is not entirely clear which inflation indicator is the most relevant. Core inflation ignores the effect of volatile food and energy prices, which are very relevant to Japan. Inflation in domestic goods or imported inflation, such as the result of currency movements, may have different policy implications.

Forward guidance relies on the accuracy of forecasts. It implies an automatic rule-based central banking response, which could lead to a sudden and sharp change in interest rate or monetary policy.

In reality, guidance is highly conditional. Environmental changes can negate any earlier policy commitment. The Fed, for instance, was forced to clarify that its unemployment target was merely a non-binding indicator.

The most damning problem, as Citibank Chief Economist Willem Buiter has argued, is that central bankers have “no skin in the game.” Central banks do not stand to make or lose money from their forward commitments. Central bankers’ tenure or remuneration is also not linked to outcomes.

Satyajit Das Newman Communications via Bloomberg

Forward guidance can also be compromised by inconsistency and conflicts amongst policy makers in an age of instant communication.

For example, consider this chain of events from eurozone officials on rates:

On July 4, 2013, European Central Bank President Mario Draghi announced that “key ECB rates [will] remain at present or lower levels for an extended period of time.” On July 5, Governor of the Bank of Finland Erkki Liikanen stated that: “Everything depends on the development of the economy.” On July 6, ECB Board Member Benoit Coeure observed: “[forward guidance is] a change in communication but not in monetary policy strategy.”

On July 8, Draghi provided clarification: “We’ll have to see what the market reaction has been, is and will be to this statement.” On July 9, ECB Board Member Joerg Asmussen said: “[the period] is not six months, it’s not 12, it goes beyond,” to which the ECB immediately issued a statement saying Asmussen did not intend to give guidance on the exact length of time for which it expects to keep rates at record lows. Then, on July 11, Bundesbank President Jens Weidmann resorted to classical allusion: “It is not an absolute advanced commitment of the interest rate path. The ECB Council has not, like Odysseus, simply tied itself to the mast.”

More recently, Fed Chairman Janet Yellen has tied herself up in verbal and economic knots over the exact meaning of the term “ considerable time,” referring to when the U.S. central bank may increase rates.

Forward guidance is a flawed approach. It robs central bankers of their cloak of “constructive ambiguity” — and the flexibility they’ve traditionally enjoyed — and instead draws unwanted focus on the limits of central banking instruments and the lack of power that policy makers wield over economic activity.