Central bankers embarrassment over tightening

Peter Warburton - 07 July 2017

“There is a tide in the affairs of men. Which, taken at the flood, leads on to fortune; Omitted, all the voyage of their life is bound in shallows and in miseries. On such a full sea are we now afloat…”
Julius Caesar, Act-IV, Scene-III

Gatherings of central bankers are mostly dull affairs, but from time to time their assembly prompts a galvanising call to action.  A good illustration would be the celebration of the tricentenary of the Bank of England in early 1994. The chair and governors of the US Federal Reserve returned with a renewed sense of purpose and raised the funds rate, an action that had seemed justified many months earlier. The results were not pretty, but the Fed spiked an episode of extreme complacency and speculation. Could it be that last week’s ECB Forum on Central Banking in Sintra will be remembered for similar reasons?

This time, it could be argued, the US Fed has already nailed its colours to the mast and is sailing, on the available tide, into the port of Policy Normalisation as fast as it dares. Its programme of balance sheet shrinkage (see figure 1) is far from timid. The other ships – including the European Central Bank, Bank of Japan and Bank of England – are still bobbing around outside the harbour walls but the published speeches and panel remarks from Sintra indicate that these central banks are at last beginning to feel bold enough to remove their long-lasting accommodations.

However, these hawkish expressions of intent are whispered, rather than broadcast. Mario Draghi, ECB president, buried the following weasel words in his speech:

“As the economy continues to recover, a constant policy stance will become more accommodative, and the central bank can accompany the recovery by adjusting the parameters of its policy instruments – not in order to tighten the policy stance, but to keep it broadly unchanged.”  (italics added)

Translation: We intend to normalise Euro area interest rates, but to claim that policy is unchanged!

Andy Haldane, chief economist of the Bank of England, opined that “a 25 basis point rise would do no more than remove a proportion – according to our GDP ready reckoners, around a quarter – of the incremental stimulus that the MPC provided last August. In other words, a 25 basis point tightening would still leave the UK monetary policy stance significantly more accommodative than a year ago.”  (italics added)

Translation: We should have reversed the August cut months ago!

Whether a brisker trajectory of policy tightening leads to good fortune for central banks and their host economies is open to debate. Rather, in failing to take the opportunity presented, their lives will be “bound in shallows and in miseries.” Departing central bankers may feel a greater urgency of action than those with longer tenures. If so, then the broadly coincident expiry of the current terms of the incumbents may be significant. Should Janet Yellen be relieved of her duties, this will happen on or around the beginning of next February. Kuroda’s term expires next March; Carney leaves in June 2019 and Draghi, by the end of October 2019. Time to set sail, whether to glory or ignominy.

Data source: FRED

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