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.
The Fed is not the only central bank to have done this. The Bank of England have flip-flopped just like their peers the other side of the Atlantic. The BOE also has pledged to keep interest rates low until the unemployment rate declines to 7%, a mere 0.7% from where the rate is now. However, in a recent speech, BOE Governor Mark Carney said that if the unemployment did fall to 7% it would not automatically trigger a rate rise… Confused? So is the market.