lunes, 24 de julio de 2017

lunes, julio 24, 2017

How to Prepare When Central Banks All Row in the Same Direction

Central banks are reacting to a global economy moving in the same direction for the first time in years

By Richard Barley


The central-bank landscape has changed. Divergence is dead, and convergence is in the cards. Such transitions are when things start to get tricky.

The turn in the tide at central banks—whether it be the European Central Bank charting a path to reducing bond purchases, the Federal Reserve preparing to rein in its balance sheet, the Bank of Japan’s stealth tapering, the Bank of England talking of a rate rise or the Bank of Canada actually raising rates for the first time in seven years—has led to speculation about coordinated action. The idea that a secret cabal of central bankers have conspired to work together was dismissed recently by ECB executive board member Peter Praet.

The more likely explanation is simply that central banks are reacting to a global economy moving in the same direction for the first time in years. After a decade of crisis-fighting policy, there is no obvious crisis to fight. Output gaps are closing, and economic volatility is low. The threat of deflation has faded. Inflation is below target in many countries, with the exception of the U.K. But central bankers are generally making the argument that softness in headline measures is transitory, with growth holding up and labor markets tightening.

That shift matters for markets. It tips the balance for future policy actions: economic data would need to deteriorate persistently for a change in tone. And it allows room for central bankers to consider other risks, in particular the steep rise in asset prices that their policies have engendered and which may yet pose a threat to financial stability.

The question is whether markets have taken that on board. This week’s action highlights that.

First, markets put a dovish spin, perhaps unwarrantedly, on Fed Chairwoman Janet Yellen’s testimony Wednesday and the “everything rally” resumed: prices for stocks, bonds and gold all rose. But to the extent that markets ease financial conditions, they may actually encourage central bankers to tighten policy. Bonds fell back Thursday after The Wall Street Journal reported ECB President Mario Draghi could signal a shift in policy at the Fed’s Jackson Hole conference in August.

The European Central Bank headquarters in Frankfurt. ECB President Mario Draghi could signal a shift in policy at the Fed’s Jackson Hole conference in August. Photo: RALPH ORLOWSKI/REUTERS


Clouding the picture, markets could yet do some of the tightening for central banks, particularly when it comes to currencies. For instance, the ECB may have a problem if the euro charges higher, as a 10% rise in the trade-weighted exchange rate could shave 0.5 percentage point off inflation, notes Lombard Street Research. No wonder the Fed and the ECB are eager to talk about how they will move gradually. The risk to markets is that investors get too comfortable with this idea.

This push-and-pull seems likely to lead to higher volatility. Central bankers have for a long time been investors’ best friends. Now the relationship is a lot more complicated.

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