Candour from central bankers is overdue

When did you last hear mandarins speak clearly about radical monetary policy?

By: James Grant
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Mario Draghi at the ECB forum on central banking in Sintra, Portugal, in June © Reuters


The central bankers’ foggy words obscure the how and the why of modern monetary management. They likewise conceal the right and the wrong of it.

The US Federal Reserve is trying to extricate itself from the methods of crisis management it improvised when there was a crisis. Ben Bernanke was chairman when the Fed began to promise to reverse its emergency policies — to raise interest rates and shrink its ungainly balance sheet. This was in 2011. Janet Yellen, his successor, reiterated that intention last month. Talk is the new action.

The sheer volume of monetary verbiage deadens the central bankers’ message, if a message there be. In 2007, when the financial rains began to fall, the policy statements of the Fed’s rate-setting committee ran to an average length of 214 words. This year, they weigh in at 892 words.

Not a little of the extra content is devoted to vacillation. Last month’s “Addendum to the Policy Normalisation Principles and Plans” concluded with a lengthy escape clause. “Normalisation” will cease if the American economy encounters difficulties, said the central bank in so many words.

If only the mandarins spoke so clearly. “Interest rates are prices,” as they are not in the habit of saying but should certainly admit. “Suppressing them, we distort perceptions of risk and flatter the value of future cash flows. On form, this will blow up in our faces.”

Or, as not one central banker has ever been heard to say, “Really, what we’re doing has never been done before. There’s no way of predicting how it will turn out. The negative nominal yields attached to a certain number of sovereign securities in Europe and Japan today are a 5,000-year first — never before seen in history. We couldn’t tell you exactly what quantitative easing would do. And we certainly can’t predict what the withdrawal of that so-called stimulus will achieve. The future is a closed book.”

It would be useful if the central bankers were held to the same standards of truth-telling as those required of pharmaceutical manufacturers. “Here is a therapy, and here are its side effects,” the law requires the drugmakers to say. Pending adaptation of that enlightened rule to monetary affairs, the public will have to translate central banking patois as best it can.

Inflation is a subject requiring special textual exegesis. Minutes of its June meeting reveal the Fed’s preoccupation with rising prices — it wants them to rise a little faster. The central bankers worry that the dollar commands an undesirably high quotient of purchasing power. They wish to weaken it. Yet — as the minutes also reveal — the committeemen fear that a weaker dollar will serve to levitate the already sky-scraping prices of stocks, bonds and real estate.

Candour would require a clean breast of the fact that inflation data are hard to interpret and that the margin for error in measuring prices is perhaps greater than the target range at which the Fed and its like-minded central banks continue to take aim.

Anyway, if “price stability” is the great desideratum, why do the monetary authorities strive for a 2 per cent rate of inflation? And are they not aware that the consequences of credit formation are complex and unforeseeable? Will they not admit that trillions of dollars of new credit might lift prices of stocks and bonds instead of those of petrol and groceries (as indeed they have)? Or that, from 1960-65 in the US, consumer prices never showed a year-on-year rise of as much as 2 per cent, yet the country grew?“

Risk, like energy, tends to be conserved not dissipated, to change its composition but not its quantum,” said Andy Haldane, chief economist of the Bank of England, in 2014. Bearing those wise words in mind, we should expect trouble to flare up in unexpected places. And we should expect the central banks to respond with main force: still lower interest rates and more quantitative easing.

The truth, yet unspoken from on high, is that radical monetary policy begets more radical monetary policy.


The writer is editor of Grant’s Interest Rate Observer

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