Cen­tral bankers to slowly cut off easy money

The Daily Star (Lebanon) - - BUSINESS - By Balazs Koranyi and Francesco Canepa

FRANK­FURT: Four of the world’s top cen­tral bankers promised Tues­day to keep openly guid­ing in­vestors about fu­ture pol­icy moves as they slowly with­draw the huge mone­tary stim­u­lus rolled out dur­ing the fi­nan­cial cri­sis.

Af­ter pump­ing some $10 tril­lion into fi­nan­cial mar­kets since the 2008 cri­sis – driv­ing many to record highs – the Fed­eral Re­serve, Euro­pean Cen­tral Bank, Bank of Eng­land and Bank of Ja­pan are now try­ing to wean in­vestors off easy money with­out caus­ing an up­set.

To do this, words will be key, the heads of the four cen­tral banks told an ECB con­fer­ence on com­mu­ni­ca­tion. It is called for­ward guid­ance in banker-speak, es­sen­tially warn­ing gen­tly of what is com­ing.

“For­ward guid­ance has be­come a full-fledged mone­tary pol­icy in­stru­ment,” ECB Pres­i­dent Mario Draghi said. “Why dis­card a mone­tary pol­icy in­stru­ment that has proved to be ef­fec­tive?”

Draghi and his three coun­ter­parts are at very dif­fer­ent stages in roll­back process.

The Fed is look­ing at its fifth rate in­crease and the BOE raised its own rate this month for the first time in 10 years. But the ECB is merely re­duc­ing the pace of its bond pur­chases, and the BOJ is still print­ing money at full speed, al­though it has sig­naled that no ad­di­tional stim­u­lus is likely.

Fed Chair Janet Yellen agreed with Draghi that guid­ance has been ben­e­fi­cial “on bal­ance” but stressed it should al­ways be viewed as de­pend­ing on how the econ­omy ac­tu­ally de­vel­ops.

“All guid­ance should be con­di­tional and re­lated to the out­look for the econ­omy,” she said.

Banks such as the ECB of­ten say the en­vis­age do­ing some­thing but re­serve the right to change their mind if cir­cum­stances change.

His­tory shows that pre­par­ing the ground for a with­drawal of stim­u­lus is not al­ways easy.

Then-Fed chair Ben Ber­nanke fa­mously sent global bond mar­kets into a tail­spin in May 2013 by sug­gest­ing that bond pur­chases could be re­duced.

In the event, the “ta­per tantrum” meant bond buys would not be re­duced for an­other 10 months.

Draghi had his own mini-tantrum in June when he hinted that the ECB’s pol­icy could be tweaked to re­flect stronger growth. The mar­ket sell-off that fol­lowed was so big the even­tual scal­ing back of pur­chases was rel­a­tively small and drawn out.

And Bank of Eng­land Gov­er­nor Mark Carney’s guid­ance on the path for in­ter­est rates has re­peat­edly been knocked off course by sur­prises in the econ­omy, prompt­ing one law­maker to call him an “un­re­li­able boyfriend.”

Hyun Song Shin of the Bank of In­ter­na­tional Set­tle­ments told the ECB con­fer­ence such un­re­li­a­bil­ity was not nec­es­sar­ily all bad. Too much “pre­dictabil­ity and grad­u­al­ism” could lead in­vestors to take on too much risk.

“Pre­dictabil­ity and grad­u­al­ism may not be a virtue if mar­ket par­tic­i­pants take them as a com­mit­ment not to pull the rug from un­der their feet while they build up lever­age and risk-tak­ing,” the BIS’s head of re­search said.

Speak­ing along­side Yellen and Draghi, Bank of Ja­pan Gov­er­nor Haruhiko Kuroda said the best way to avoid mis­un­der­stand­ings was to keep the mes­sage sim­ple.

“It should bet­ter be straight­for­ward,”he­said.“That’sthebest­way.”

His UK coun­ter­part, Carney, stressed the im­por­tance of reach­ing the broader pub­lic, rather than just fi­nan­cial in­vestors.

“We’re speak­ing to the peo­ple we serve first,” Carney said. “Three hun­dred thou­sand peo­ple read the Fi­nan­cial Times; there are 30 mil­lion Face­book users in the U.K..”

Yellen noted that con­flict­ing mes­sages by dif­fer­ent Fed pol­i­cy­mak­ers risked con­fus­ing the pub­lic.

Fed gov­er­nors talk on an al­most daily ba­sis, Kuroda speaks fre­quently and some of the ECB’s 25 rate-set­ters ap­pear to live a life of their own, some­times giv­ing speeches at odds with the ECB’s main pol­icy lines.

A sur­vey by the Brook­ings In­sti­tute think tank found that two-thirds of Fed watch­ers wanted gov­er­nors to speak less fre­quently and over half wanted Yellen to speak more in­stead, to stream­line and fo­cus the mes­sage.

Yellen will be re­placed as Fed chair in March next year, Carney and Draghi’s terms are up in 2019, and only this week a se­nior aide to Ja­panese prime min­is­ter Shinzo Abe rec­om­mended that Bank of Ja­pan Gov­er­nor Kuroda not be reap­pointed.

Yellen and Draghi at­tend the ECB’s Cen­tral Bank Com­mu­ni­ca­tions Con­fer­ence in Frank­furt, Ger­many.

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