Mark Carney has really put his stamp of authority on the Bank of England (BoE). After just one month as the BoE’s new governor, he’s already shaking things up. At the latest meeting of the Monetary Policy Committee (MPC), he introduced forward guidance that would have been almost unimaginable under the previous Governor, Mervyn King.
Here’s what Carney’s forward guidance looks like. The MPC intends not to raise their benchmark bank rate from its current level of 0.5% until the unemployment rate falls to a threshold level of 7%. This is subject to three caveats:
- inflation is no higher than 0.5% above the 2% inflation target at the 18-24 month horizon
- medium-term inflation expectations are contained
- and the Financial Policy Committee (FPC) believes that an accommodative monetary policy stance doesn’t pose a risk to financial stability. Read more
The Reserve Bank of Australia must be feeling pressure to provide financial markets with explicit forward guidance on the long-term direction of its interest rate strategy. These days, with central banks all over the world providing markets with forward guidance on rates in an effort to shape market expectations, the RBA is one of the few remaining major central banks to maintain a sense of anticipation at each meeting – rates could just as easily go up as they could go down. Even the European Central Bank has finally backed away from its sacred no “pre-commitment” policy. Check out my previous post on forward guidance here.
Increasingly these days, what was once considered to be “abnormal,” markets are beginning to construe as “normal.” A central bank that doesn’t provide forward guidance is increasingly seen as hawkish (“do they have something to hide?”) and markets tend to react by driving up its bond yields and their respective currency – effectively tightening financial conditions.
In a recent economic commentary (here’s the link), Bob Baur and I examined the pros and cons of the two top candidates to succeed Ben Bernanke as Chairman of the Federal Reserve: Janet Yellen and Larry Summers. Today, I’d like to use this blog post to examine a few different avenues where Yellen and Summers might differ were each to get the Fed’s top job.
The first way I’d look at this would be from their respective statements on Fed policy. Almost everything we’ve heard from Yellen suggests that she’ll be Spider-Man 2 to Bernanke’s Spider-Man…more of the same, still pretty good, but not saddled with the task of having to explain how this all started. Summers is harder to read. Read more
Every summer, Monaco is home to the annual Fund Forum International conference, a high-powered meeting of asset managers and fund selectors. The weather outside the conference is invariably gorgeous, but this year, the climate inside the conference was distinctly chilly. Why? The Fed’s suggestion that the flow of money into the markets in the form of quantitative easing might be coming to an end. This was made abundantly clear in recent market activity, but it was just as obvious with the participants at the Fund Forum. Shoulders were a little more slumped, brows a little more furrowed. Bond managers were downright fractious. Read more
I know you think you understand what you thought I said, but I’m not sure you realize that what you heard is not what I meant.
Alan Greenspan said it, but it certainly captures what current Fed chairman, Ben Bernanke, has to be thinking. In his efforts to be open and transparent, Bernanke has struggled over recent weeks to make himself understood. Markets reacted to talk of tapering the bond-buying QE program as if the Fed had announced that it would be hiking the fed funds rate to 5% by Labor Day. So since the last Fed meeting, Bernanke and several Fed governors have been in the public eye trying to clarify that “tapering” is not “tightening.”
With the release of the latest FOMC meeting’s minutes (available here), and echoed in his speech on July 10 (text here), we saw a bit more clarity that’s meant to ease markets back towards Bernanke’s intended message. Two key points that you can pull from the recent Fed communications: Read more
Oh yeah, I’ll tell you something
I think you’ll understand
When I say that something
I want to hold your hand
- “I Want to Hold Your Hand,” The Beatles
Hand-holding is getting to be very popular with the world’s major central banks. Effectively constrained by zero or near-zero interest rates, central banks have been putting greater emphasis on the effectiveness of their communications. Central bank “speak” – if used wisely – holds the power to ease monetary conditions as much as, if not more than, policy rate changes. Read more
Several Fed presidents, and “Big Ben” Bernanke himself, have been spending the last week or so trying to convince markets that their program of quantitative easing isn’t on the immediate chopping block and that any eventual tapering would be contingent on continued economic improvement. They’ve tried speeches, press conferences…maybe it’s time for a novelty song, sung to soothe markets back toward normality?
“Tiptoe through the Taper”
by ‘Big Ben’ Bernanke
- Sung to the tune of “Tiptoe through the Tulips” by Tiny Tim, accompanied by ukulele
Panic, after the meeting,
After the meeting of the F-O-M-C
Come tiptoe through the taper with me. Read more