Central bank chiefs used to be the poster children for policy. Governors were often seen as the face of financial orthodoxy, their words and speeches taken as the official line of their respective institutions. From Volcker’s hard-line attitude to US inflation in the 1970s through to the famous “Greenspan put” in the 1990s and 2000s, they were seen as the financial rock stars of their day rather than the technocrats that they ultimately were.
Since the mid-2000s however, much has changed. Racked by uncertainty and mixed economic signals, central bankers would these days rather cosy up to the comfort of decision making by committee; sharing the responsibility with others, but ultimately losing a good deal of control over the direction of policy. Failures in forward guidance – we all remember Carney’s ‘7% unemployment target’ – made this decision easier still.
Comments by key Bank of England decision makers in recent weeks have been prime examples of this, as well as alerting us to some of the pitfalls of this approach.
We saw a notable shift at the latest Bank meeting, with Chief Economist Andy Haldane coming down from the fence and deciding that the time might be ripe to raise the cost of borrowing in the UK. In breaking rank, he joined long-time rate rise fans Ian McCafferty and Michael Saunders in voting for a 0.25% rise on 21 June. These comments were echoed in his speech last Thursday, in which he noted that such a rise “…would still leave monetary conditions in the UK extraordinarily accommodative by any historic metric.” On the face of it, this would suggest that the decision-making Monetary Policy Committee is adopting a more hawkish tone; a line which markets appear to have bought into. The OIS market is currently pricing in a 67% chance of a hike at the next meeting on 2 August, up from the low 40s at the beginning of the month.
However, an August hike is far from a done deal. New MPC member Prof Jonathan Haskel was certainly more cautious in his own comments last week, pointing to the possibility that slack may be higher than currently estimated, which would put the committee in less of a hurry to tighten. Due to replace arch-hawk Ian McCafferty at the beginning of September, Haskel’s appointment could put the brakes on the slow drift towards further rate hikes in the months ahead. Contrast indeed to Mr Haldane.
This ultimately brings us back to the problem at hand. Decision-making by committee and greater willingness to bring the public and the press into the process has been seen as the correct direction for central banks to take since the start of the 21st Century. But if recent deliberations prove anything, it might be the need for a steadier hand through periods of significant transition and major shifts in policy. Debate is welcome, of course, but to the extent that uncertainty itself has its own costs, reducing the yo-yoing of policymaker preferences in the public forum should also be an aim.
Perhaps it would be better if more of the discussion happened behind closed doors. Perhaps policymakers should keep the cards a little closer to their chests. Perhaps, in fact, central bank openness has gone too far.
Upcoming data releases
We are due to see an update on interest rates from the Reserve Bank of Australia this Tuesday, where consensus suggests that policymakers may keep their powder dry for some time still. Should this be the case, there will have been no change in the 1.5% cash rate for 21 meetings on the trot, and economists recently polled by the Australian Financial Review reckon the rate will stay where it is through 2019. We will also have a speech from Mark Carney as part of a regional visit to the North East of the UK. While it would be unlikely for the BoE governor to drop any material hints at this low-key event, central bank watchers will nonetheless go through his words with a fine tooth comb to look for any hint of his intentions for an August hike. Elsewhere this week we will see Fed minutes released on Friday and a flurry of PMI data for the world’s major economies over the next five days.