`BANK WATCHERS' SHOW WHY THE BoC IS TAKING COMMUNICATIONS INTO ITS OWN HANDS
Macklem has figured out he doesn't need policy interpreters, Kevin Carmichael says.
Tiff Macklem, the Bank of Canada governor, took only three questions after his latest speech.
The first, from Sonia Baxendale, head of the Global Risk Institute, which hosted Macklem's virtual remarks, was about how the COVID-19 crisis differs from the Great Recession.
“At a global level, the level of cooperation in '08-'09 was stronger than we are seeing (today),” said Macklem, who was the Finance Department's top diplomat during the Great Recession.
Noteworthy, given the source of the critique, but not newsworthy, since the go-it-alone nature of the fight against the pandemic had been widely discussed.
Baxendale's next question, however, brought a response that generated some headlines and got Bay Street talking. She asked what ammunition Macklem had left, considering the Bank of Canada has already dropped the benchmark interest rate to almost zero and created hundreds of billions of dollars to purchase bonds.
“We have a wide range of tools in our toolkit. The bank has been very transparent about that,” the governor said. “Some of the other tools, which we haven't deployed to this point: funding for lending, our European colleagues have been using for some time negative interest rates, Japan and Australia are using yield-curve control; these are tools in our extended toolkit. We're not actively discussing negative interest rates at this point, but it's in the toolkit and never say never.”
Nothing surprising there, either, since it just reiterated existing policy. But at least a couple of news organizations thought they detected movement.
Market News International, a financial news service, published an article under the headline: “BoC Governor Shifts to Say Negative Rates Possible.” Bloomberg News said something similar, backed by Bank of Nova Scotia economist Derek Holt, who said Macklem was “putting the concept back on the table if downside risks intensify.”
The Financial Post published the Bloomberg story, and the Globe and Mail noted Macklem's mention of negative rates in its story on the speech, which was about financial stability.
However, there was no shift by the central bank. Concluding otherwise meant you had interpreted the Bank of Canada's skepticism about the efficacy of negative interest rates as the equivalent of tossing a wonky set of vice grips in the trash. Hearing Macklem state that he would “never say never” about dropping the benchmark interest rate below zero would sound like news in that case.
But Macklem hadn't abandoned negative rates, maintaining that even the most useless wrench is better than no wrench if nothing else is working. Mark Chandler, the outgoing head of Canadian rates strategy at
RBC Dominion Securities Inc., who Bloomberg described as the “dean of Toronto's trading floors” after word of his pending retirement got out last month, reassured his clients on Oct. 13 that the governor's comments were “consistent” with earlier statements.
The Bank of Canada would have validated Chandler's take if anyone had bothered to ask. “Governor Macklem's comments last week that negative interest rates remain part of the bank's policy toolkit, but are not actively being discussed by governing council, are entirely consistent with his and the bank's other recent comments on the topic,” Rebecca Spence, a spokesperson, said in an email on Oct. 14.
This brings us to the third question Macklem received from the Global Risk Institute, which was about communications.
Macklem in August said he intended to rely less on intermediaries such as bank economists and reporters to deliver his message, pledging to communicate directly with the public on a more regular basis. He couldn't have known that even as he answered Baxendale's final query, some bank economists and reporters were preparing to demonstrate why the Bank of Canada thinks they can no longer be trusted to clearly explain monetary policy.
“The way it's typically worked is we communicate with markets, they interpret what we've done to the media, and then the media speaks to Canadians,” Macklem said in response to the question. “More recently, what you've seen at the Bank of Canada, and other central banks are doing the same thing, we are putting more focus on speaking directly to Canadians. That is something where we will need to redouble our efforts.”
Bay Street's clique of professional bank watchers, a group that includes a couple of dozen analysts and journalists, ought to view this as something close to an existential threat. Whatever cachet we thought we had earned as interpreters of monetary policy arcana is in jeopardy because we too often botch the job. The Bank of Canada has figured out that it doesn't need us.
In August, Macklem cited a paper by Olivier Coibion of the University of Texas at Austin and two co-authors that suggests newspapers do a poor job of instilling confidence in monetary policy.
Coibion, Yuriy Gorodnichenko of the University of California, Berkeley, and Michael Weber of the University of Chicago gathered a sample of some 20,000 participants to test inflation expectations.
They showed a subset reporting on U.S. Federal Reserve decisions by USA Today and “determined that households found simple statements such as the Fed's inflation outlook far more convincing than the newspaper stories.”
“Relying on the conventional media to diffuse their message to the public can be ineffective because many households no longer read newspapers and even if they do, individuals discount reports from the news media,” the authors said in their paper.
A central bank has to take such a finding seriously because guiding inflation expectations is one of the ways central banks achieve price stability. Analysts and journalists also should take note, too. If the public discounts what we're doing, it will be difficult to continue making a decent living doing it.
Relying on the conventional media to diffuse their message ... can be ineffective because many households no longer read newspapers.