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Central bankers should learn to keep their mouths shut

8 Comments

After ingesting the Trump agenda and spitting out its market implications investors and traders can get back to their usual pastime: trying to work out what central bankers are plotting.

Two vital meetings loom in the next 10 days. The political upheaval in Italy means that the European Central Bank is all but certain to extend its big bond-buying program, due to end in March 2017, by a further six months when it meets on Thursday. Less than a week later, the U.S. Federal Reserve is expected to raise its main interest rate at its conclave on December 13 and 14 - a year after its first increase in almost a decade.

As is now customary, posses of central bankers have been out in force on either side of the Atlantic, providing clues about their respective intentions. A speech in November by ECB president Mario Draghi set out "the reasons why we cannot yet drop our guard," suggesting that he backs an extension of bond purchases. Meanwhile the Fed chair Janet Yellen said that an interest-rate increase "could well become appropriate relatively soon." All this chit-chat may be good for the cottage industry of highly paid central-bank watchers, but monetary policymakers have become too talkative for their and the wider good, sowing confusion and losing credibility in the process.

This craze for communication is surprisingly recent. Central bankers once prided themselves for being taciturn and, if not that, inscrutable. Alan Greenspan, chairman of the Fed between 1987 and 2006, was famously gnomic. The first time that the Fed issued a statement immediately after a meeting of its rate-setters was in February 1994, when it helpfully pointed out that rates had gone up for the first time since early 1989. Not until May 1999 did the Fed start to issue one after each meeting regardless of whether there had been any changes.

Nowadays there is a surfeit rather than a lack of communication. Scarcely a day goes by without some pronouncement from a central banker whether in an interview, a speech, a press conference or in testimony to lawmakers. The case for more openness - to citizens and parliaments as well as markets - was at first straightforward. It formed part of a new model for monetary policy in which independent central banks sought price stability. In such a framework words count as much as deeds. They allow central bankers to mold expectations of future inflation, which feed back into actual inflation as businesses set prices and negotiate wages.

The need to communicate became even more pressing when the 2008 financial crisis caused economies to tank. Central bankers had to justify the unorthodox measures they took to restore growth and meet their inflation targets. In particular they needed to assure the public and parliaments that quantitative easing - creating money to buy bonds - would not kindle an inflationary fire. More recently the ECB has had to defend its policy of ultralow and indeed negative interest rates that vexes savers in the euro area and especially in Germany. Draghi, for example, stressed the wider economic gains from lower interest rates, including the relief for borrowers, when speaking to German lawmakers in Berlin in the fall.

Central banks have also intensified their attempts to shape expectations about monetary policy through "forward guidance." Before the crisis central bankers sometimes dropped hints about impending rate changes in order to smooth their effects as traders anticipated the decisions. Jean-Claude Trichet, the ECB's president between 2003 and 2011, would talk about "strong vigilance" when the bank was contemplating a rate rise.

But forward guidance goes beyond hints about short-term decisions to explicit undertakings about the longer-term stance of monetary policy, including dates and thresholds for a critical gauge of the economy such as unemployment.

Central bankers have overdone their attempts to talk their way out of an economic hole. Attempts to direct markets well into the future have lost credibility as policymakers failed to follow their own signals. Mark Carney made forward guidance his signature tune when he took over as governor at the Bank of England in the summer of 2013, but it soon went off-key. The Bank swiftly had to abandon a guideline linked to falling unemployment as the jobless rate sank much more rapidly than expected.

If forward guidance has proved too ambitious, communication can also come unstuck through infighting within the crucial committees that determine monetary policy. What central bankers have to say in public may then reflect internal divisions rather than offering a window into an agreed direction for policy. Typically, heads of central banks will get their way, but not always. A year ago, for example, Draghi disappointed the markets when the ECB delivered less than he had appeared to offer in the run-up to the December meeting. The central-bank gazers had put too much weight on his views and not enough on those of other, more cautious, members of the ECB's 25-strong governing council.

Overtalkative and at times quarrelling central bankers undo the potential gains from communication. The signal gets lost in the noise. As worrying, the febrile focus on what monetary policymakers have to say reveals how dependent markets have become on central banks. This is a clinch that has become too tight for both sides.

Breaking the clinch through restoring more normal monetary-policy settings will have to be undertaken delicately and gradually. But in the meantime a little less talk from central bankers would be no bad thing. Central bankers are no doubt flattered by all the attention they receive. But they are not rock stars - and they shouldn't expect to get that kind of attention.

© (c) Copyright Thomson Reuters 2016.

©2024 GPlusMedia Inc.

8 Comments
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It could be argued that all central banks, especially the privately-owned ones, are part of the problem, not the solution. Now we are hooked on them like junkies because cold turkey is a dreadful alternative.

1 ( +3 / -2 )

t could be argued that all central banks, especially the privately-owned ones, are part of the problem, not the solution.

And this is what happens when the public sector controls too much of the economy. With the majority of what the private-sector economy produces now consumed by the state (which generates less return than it consumes), there is not enough left over to create new businesses and jobs. And the only way to keep such a money-losing machine in operation is for central banks to try to intervene by printing and adding more money to the economy, and to push down interest rates. At least this is what they say. In reality, the money printed goes mainly to the state, where it once again spent in ways which create a negative return, and the low rates are implemented mainly to ease the state's debt burden, and allow it to borrow and spend even more.

1 ( +3 / -2 )

I agree with the headline and I agree with moonraker. These people have perpeturated a situation which will end up like Japan. Permanently low rates and low growth.

3 ( +3 / -0 )

I think nobody understands what it is all about. Remember what they said if Trump wins? Well, look at that $20,000 coming like a bullet train.

-4 ( +0 / -4 )

"These people have perpeturated a situation which will end up like Japan."

Nope. Japan's 1991 crisis and the world's 2008 crisis were caused by the private sector, not by the central banks. Frenzied speculation on real estate by private investors, who were spurred on by irresponsible and greedy lending practices by the commercial banks, and massive stock and bond fraud committed by private financial institutions.

"And this is what happens when the public sector controls too much of the economy."

Completely wrong. China's banks are state owned. No financial crisis there, despite all its problems. Canada's banks are a state-enforced oligopoly. No crisis there. US and Japanese banks....private and loosely regulated in the lead ups to the meltdowns.

-4 ( +1 / -5 )

China's banks are state owned. No financial crisis there,

Not yet, but China is fast approaching the end to it's own bubble economy. Capital has been fleeing China, despite state attempts to prevent it from doing so. You are welcome to move to China, and earn an monthly income equal to what an English teacher in Japan makes in three or four days.

As for private banks being "loosely regulated," you obviously know nothing about the industry.

The meltdowns as you call them are not caused by the banks, but by interventions by governments in their attempts to create growth at all times. This causes growth to be excessive, and when anything is taller or bigger than the environment can support, it collapses, or "melts down." Like Japan's central bank saying foolishly that the economy will reach a 2% inflation goal no matter what, not realizing that by creating inflation which is not driven by increased economy activity is setting the state for yet another meltdown.

The politicians and bureaucrats who run the government are no less greedy or fallible than those who run banks. In reality, they are usually more greedy and more fallible because they don't face the same consequences for failure than anyone in a private business would. If Abe were the head of a large company, and had failed as badly as he has failed in leading the country, he would have been tossed out long ago. If Kuroda had been managing a private bank as badly as he has managed the central bank, he too would have been sent packing.

The best bank would be one which was entirely unregulated and uninsured by the state. It would have to make money solely on the merits of it's services. You mention China's state-owned banks, but you make no mention of China's shadow banking industry, which is incredibly large (it has existed for centuries, in most countries in the world), and which is probably much more financially sound than China's state-run banks.

Japan's 1991 crisis and the world's 2008 crisis were caused by the private sector,

Wrong. Japan's 1991 crisis was caused by the central bank, which had kept the yen artificially weak for decades. When the Plaza Accord spelled the end to Japan's currency manipulation, and Japanese companies eventually had to compete without a weak currency, the collapse soon occurred. They have never recovered.

The 2008 collapse in America could be attributed to government intervention in the economy after the bursting of the dot com bubble, in which interest rates were lowered in order to make borrowing easier. In America there is a law called the "fair lending act," which require banks to lend to people even if their reasons for borrowing are not solid. And then there was the CRA act, which required banks to lend to lower income people with poor credit. These people with lower incomes and poor credit did borrow, and they borrowed a lot, and when they failed to repay what they had borrowed, the industry collapsed. The banks have some fault, as they should have foreseen a collapse in housing values, but as mortgages were traded as equities, and bought by other banks which did not know the borrower's credit worthiness, this made what was a bad thing even worse.

The worst thing the government did afterwards was to intervene again, and save the banks. The banks should have been allowed to collapse, and to be reorganized in the bankruptcy courts, and not have been bailed out at the taxpayers' expense. In such a case, the banks are not truly private-sector banks, they are essentially state-controlled. Had the banks been allowed to collapse, depositors would have recovered their money from the FDIC, the executives would have lost their jobs, and the banks would have had to restructure before coming out of bankruptcy.

1 ( +3 / -2 )

Not yet, but China is fast approaching the end to it's own bubble economy.

People have been claiming that for years. I don't disagree that it's possible, and I have contingency plans in place for if it happens, but by no means is it guaranteed.

Particularly with this Trump presidency - I can see many countries gravitating towards China as an alternative to America during his presidency. The more outrageous and unstable America becomes, the more people will look to alternatives. This will only strengthen China's economy, not weaken it.

-1 ( +1 / -2 )

"interest rates were lowered in order to make borrowing easier."

low interest rates is no excuse for reckless, fraudulent and stupid behavior. It's like getting drunk and crashing your car and then blaming it all on the govt because the speed limit was 50 instead of 30.

"China is fast approaching...."

To set the record straight, I cite things that actually happen to make my argument. You cite things that haven't happened, except in your imagination.

"....not caused by the banks, but by interventions by governments....."

The mortgate back securities that brought the system crashing down were invented in secret and peddled by Wall St. bankers, who chose NOT to inform the SEC and other govt authorities. The subprime cowboys were working outside govt regulation.

Govt intervention occurred AFTER the crash to fix the situation. Wall St. and GM would be extinct today if that didnt happen.

-3 ( +0 / -3 )

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