Celebrity cen­tral bankers

Financial Mirror (Cyprus) - - FRONT PAGE -

Why do the com­ments of ma­jor economies’ cen­tral bankers com­mand out­size at­ten­tion nowa­days? It is not as if they change in­ter­est rates all of the time. Nor have they de­vel­oped new, more ro­bust mod­els for analysing the econ­omy. On the con­trary, ma­jor cen­tral banks’ growth and in­fla­tion forecasts in the years since the fi­nan­cial cri­sis have con­sis­tently over­es­ti­mated both growth and in­fla­tion – and by wide mar­gins.

There are many good rea­sons for the at­ten­tion lav­ished on mon­e­tary pol­i­cy­mak­ers, in­clud­ing the rise of centralbank in­de­pen­dence, pub­lic ac­cep­tance of the need to ap­point highly com­pe­tent tech­nocrats to over­see the money sup­ply, and the deep­en­ing of fi­nan­cial mar­kets. And many cen­tral bankers have been rightly lauded for their role in pre­vent­ing a global melt­down dur­ing the fi­nan­cial cri­sis.

Even so, given the nu­mer­ous uncer­tain­ties sur­round­ing macroe­co­nomic forecasts and the ef­fects of pol­icy in­stru­ments (not least quan­ti­ta­tive eas­ing), many aca­demics find it puzzling that cen­tral bankers’ speeches and state­ments gen­er­ate so much fan­fare. And for all of their hero­ics dur­ing the fi­nan­cial cri­sis, many cen­tral bankers have been far too in­flex­i­ble in the af­ter­math, wor­ry­ing too much about over­shoot­ing in­fla­tion tar­gets, and too lit­tle about de­fla­tion­ary dy­nam­ics. More­over, cen­tral bankers bear a share of the blame for the cri­sis in the first place, mainly owing to lax reg­u­la­tory pol­icy.

Many cen­tral bankers por­tray for­mer US Fed­eral Re­serve Chair­man Alan Greenspan (who served from Au­gust 1987 un­til Jan­uary 2006) as the cul­prit, say­ing that he pro­jected an im­age of cen­tral-bank om­nipo­tence that is not war­ranted in the­ory or prac­tice. But this cri­tique is overblown: Greenspan is long gone, but the fo­cus on cen­tral-bank pro­nounce­ments is greater than ever.

What, then, is go­ing on? I would ar­gue that, in ad­di­tion to all of the fac­tors listed above, three fur­ther con­sid­er­a­tions should be noted. For starters, the pub­lic per­cep­tion that cen­tral bankers are om­ni­scient makes them an at­trac­tive whip­ping boy for politi­cians. More­over, the dig­i­tal revo­lu­tion in me­dia has el­e­vated the role of business news, one of the few profit cen­tres for print and broad­cast jour­nal­ism in many coun­tries. Cen­tral bankers’ pro­nounce­ments are of in­ter­est to busi­ness­peo­ple – es­pe­cially in the fi­nan­cial sec­tor – and busi­ness­peo­ple are of in­ter­est to ad­ver­tis­ers.

Fi­nally, and per­haps least ap­pre­ci­ated, is the fact that cen­tral-bank pol­icy pro­nounce­ments are almost unique in hav­ing clear and pre­dictable ef­fects on fi­nan­cial mar­kets, at least in the very short run (which can be a day or less). If Fed of­fi­cials sur­prise mar­kets by mak­ing more “hawk­ish” state­ments (sug­gest­ing an up­ward bias to pol­icy in­ter­est rates) than in­vestors were ex­pect­ing, the dol­lar will usu­ally ap­pre­ci­ate; long-term dol­lar in­ter­est rates will usu­ally rise; and the stock mar­ket typ­i­cally will de­cline.

True, th­ese ef­fects may be small and tran­si­tory. But, un­like most of the reams of macroe­co­nomic in­for­ma­tion with which we are bom­barded ev­ery day, cen­tral bankers’ speeches and opin­ions have rel­a­tively fore­see­able ef­fects, es­pe­cially when the bank’s chair, pres­i­dent, or gov­er­nor speaks, or other of­fi­cials speak in con­cert. And, with tril­lions of dol­lars swirling around global fi­nan­cial mar­kets, this pre­dictabil­ity cre­ates a fat tar­get, with in­vestors will­ing to make mas­sive bets when they are pretty sure they are right, even if the profit per dol­lar is small.

If you think I am ex­ag­ger­at­ing, con­sider the cov­er­age of other eco­nomic news, say, un­em­ploy­ment, GDP, or the trade bal­ance. Vir­tu­ally ev­ery story quickly shifts its fo­cus to what the data mean for mon­e­tary pol­icy.

Some eco­nomic in­di­ca­tors, such as un­em­ploy­ment or in­fla­tion data, are in­deed im­me­di­ately im­por­tant for cen­tral banks, be­cause they may di­rectly con­cern their man­dates, and there­fore have rather pre­dictable ef­fects. But much in­for­ma­tion is sim­ply noise. This makes pol­icy opin­ions that come straight from the horse’s mouth almost uniquely valu­able.

In short, there are many good rea­sons why cen­tral bankers re­ceive so much me­dia fo­cus, in­clud­ing their rel­a­tive in­de­pen­dence and gen­er­ally solid per­for­mance. But there are also other rea­sons hav­ing to do with politi­cians’ need for scape­goats, the me­dia’s strug­gle to rein­vent it­self in the In­ter­net age, and cen­tral-bank pro­nounce­ments’ pre­dictable short-term ef­fects on fi­nan­cial mar­kets. Th­ese other fac­tors have com­bined to cre­ate a bub­ble around cen­tral-bank pro­nounce­ments and de­ci­sions that grossly ex­ag­ger­ates their eco­nomic sig­nif­i­cance.

Is this a bub­ble that cen­tral bankers should worry about? The an­swer is clearly yes. The news bub­ble is of par­tic­u­lar con­cern, be­cause it re­in­forces the idea that cen­tral bankers some­how care dis­pro­por­tion­ately about fi­nan­cial mar­kets, which is gen­er­ally not the case.

Most cen­tral bankers re­ally are tar­get­ing growth, in­fla­tion, and fi­nan­cial sta­bil­ity, if not nec­es­sar­ily in that or­der. The po­lit­i­cal bub­ble is an in­evitable prod­uct of centralbank in­de­pen­dence, and pre­vent­ing mon­e­tary pol­icy from be­com­ing a tar­get for elected of­fi­cials re­quires con­stant ef­fort. The pre­dictabil­ity bub­ble is per­haps the trick­i­est to nav­i­gate, though my in­stinct is that less would be more. Ex­ag­ger­ated im­por­tance is one kind of bub­ble that cen­tral bankers should al­ways be ea­ger to burst.

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