The Great Debate UK

How central bankers have got it wrong

If you asked someone to list the chief qualities needed to be a good central banker I assume that the list may include: good communicator, wise, attention to detail, clear thinking, credibility, and good with numbers.  However, in recent months these qualities have been sadly lacking, most notably last week when the Federal Reserve wrong-footed the markets and failed to start tapering its enormous QE programme.

The market had expected asset purchases to be tapered because: 1, Ben Bernanke had dropped fairly big hints at his June press conference that tapering was likely to take place sooner rather than later and 2, because the unemployment rate has consistently declined all year and if it continues moving in this direction then it could hit the Fed’s 6.5% target rate in the coming months.

In the aftermath of the September Fed decision the markets, analysts and Fed commentators were lambasted for being too hasty and for trying to second guess the Fed. While I agree that the markets can get too hung up on the movements of the US central bank, I think that the criticism is unfair this time.

Ben Bernanke did not play fair last week, and mid-press conference shifted the tapering goal posts. He said that the unemployment rate was not a true reflection of the state of the economy (the markets said that at the time the Bank started linking asset purchases to an economic threshold), and instead said that the Fed would focus on broader measures of economic growth. This was backed up by the chairman of the Federal Reserve Bank of New York, who suggested that GDP would also play a part in informing the bank on the timing of tapering; suggesting that forward momentum in GDP is the new pre-requisite before tapering can begin, leaving the unemployment rate on the back burner.

Roll up, roll up – welcome to the great taper farce

We are at the stage of the financial cycle where central banks turn into circuses and central bankers become the circus performers. The market is transfixed by the show, watching every move and trying to anticipate what trick or shock will come next.

What is interesting about this particular circus is that the Ringmaster is about to leave, their replacement is turning into a whole new show of its own.

The watered down version of Forward Guidance

The new governor of the Bank of England has shaken things up at the Old Lady. Not only has he brought a touch of glamour to the Bank, he is considered a George Clooney look-alike by some, but he has dramatically altered the way that the Bank does things. Since he arrived a little over a month ago we’ve had statements released after meetings and now the Bank has adopted forward guidance.

But has this central banker with a twinkle in his eye run into a brick wall at the BOE? The forward guidance that he announced during the August Inflation Report went down like a lead balloon. The markets immediately challenged the Bank’s pledge to keep interest rates low until 2016, UK Gilt yields at one point rose to their highest level since before he joined as Governor, and the pound also jumped sharply.

from Anatole Kaletsky:

When illogical policy seems to work

It’s cynical, manipulative and hypocritical – and it looks like it is going to work. How often do you hear a sentence like this, to describe a government initiative or economic policy?  Not often enough.

The media and a surprisingly high proportion of business leaders, financiers and economic analysts seem to believe that policies which are dishonest, intellectually inconsistent or obviously self-interested in their motivation are ipso facto doomed to fail or to damage the public interest. But this is manifestly untrue. The effectiveness of public policies and their ultimate desirability is in practice judged not by their motivations, but by their results.

Sizing up Carney

–Kathleen Brooks is research director at forex.com. The opinions expressed are her own.–

Back  in the last quarter of 2012 when Mark Carney was announced as the Governor-elect of the Bank of England, imaginations ran wild about the new arsenal he could bring to the BoE’s toolkit for getting the UK economy moving again. GDP targeting and unlimited QE were not beyond the realms of possibility. Carney in the past had dismissed suggestions that central bankers were out of options when it came to stimulating over-leveraged developed economies. However, as we get closer to his start date the debate has shifted regarding monetary policy.

Dear Mark

–Laurence Copeland is a professor of finance at Cardiff University Business School. The opinions expressed are his own.–

Dear Mark Carney,

As you arrive in your new office, you will not be short of free advice, least of all from economists. Nonetheless, like a supporter of the away team valiantly trying to make himself heard above the roar of the home crowd, this is my feeble attempt to compete against the chorus of voices calling for ever more, ever larger doses of QE, ever lower interest rates and even more devaluation of the Pound.

Economic quagmire adds pressure for monetary policy change

–Darren Williams is Senior European Economist at AllianceBernstein. The opinions expressed are his own.–

Bank of England governor-elect, Mark Carney, has raised hopes that the central bank may soon switch to a nominal GDP target. Although the costs seem to outweigh the benefits, the attractions of a radical new approach will grow if the economy remains stuck in the doldrums.

from Anatole Kaletsky:

Is a revolution in economic thinking under way?

Four years after the start of the Great Recession, the global economy has not recovered, voters are losing patience and governments around the world are falling like ninepins. This is a situation conducive to revolutionary thinking, if not yet in politics, then maybe in economics.

In the past few months the International Monetary Fund, previously a bastion of austerity, has swung in favor of expansionary fiscal policies. The U.S. Federal Reserve has committed itself to printing money without limit until it restores full employment. And the European Central Bank has announced unlimited bond purchases with printed money, a policy denounced, quite literally, as the work of the devil by the president of the German Bundesbank.

Governments, not central banks, must act

–Michala Marcussen is global head of economics at Société Générale Corporate and Investment Bank. The opinions expressed are her own.–

Marcussen

The reflex induced by three decades of success is to look to central banks to steer the economy back to a path of sustainable growth, but five years on from the outbreak of the crisis, it is becoming increasingly evident that, despite the introduction of multiple unorthodox policy tools and huge balance sheet expansion, central banks can only help buy time, they cannot fix the underlying issues of huge debt mountains and weak trend potential growth. For this, government action is required, and as each new round of monetary policy easing seemingly comes with diminishing returns – both in terms of the absolute impact and its duration – there is a growing sense of urgency for governments to act.

from MacroScope:

Could Turkey’s central bank surprise markets this month?

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TURKEY/This Thursday, Turkey's new central bank governor Erdem Basci will chair his first monetary policy meeting.  What can we expect from the man who is seen now as the architect of the country's novel monetary policy? Most analysts predict there will be no change this month to interest rates and banks' reserve requirement ratios. But could the bank, which shocked markets with an out-of-the-blue  rate cut in December and a big further rise in short-term RRRs last month, throw another  curveball? 

ING Bank is among those which believes the central bank could again surprise markets this week.  Using Turkish banks' net off-balance sheet currency positions as a proxy, ING analyst Sengul Dagdeviren reckons short-term capital inflows are on the rise again. Banks' net off-balance sheet FX positions had halved between Nov 5 to March 4  to just over $12 billion, as the central bank drastically widened the gap between the overnight borrowing and  lending rates -- a move that discouraged short-term swap positions. But these positions have risen back over $21 billion in the month to 8 April, Dagdeviren says, noting this coincides with a 5 percent gain in the Turkish lira against the dollar.

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