Central Bank Rants

Schizophrenic #FOMC

How to reconcile these two recent comments from Janet Yellen?

‘Because a resilient financial system can withstand unexpected developments, identification of bubbles is less critical.’ (2 July)

While prices of real estate, equities, and corporate bonds have risen appreciably and valuation metrics have increased, they remain generally in line with historical norms. In some sectors, such as lower-rated corporate debt, valuations appear stretched’ (15 July)

In the first, she argues for cleaning up bubbles afterwards, rather than leaning into them [previously covered here: http://blondemoney.co.uk/2014/07/yellen-cleans-not-leans/]. So why bother in her recent testimony even to try to identify them ahead of time? She just said it wasn’t critical….?

The answer?

  1. The Fed has a new role for financial stability, and is figuring out how to handle that new responsibility. Who would want to cause another crisis so soon after the last one?
  2. The testimony presented the view of the Committee, not just of Janet herself. We know that cracks in the lower-for-longer consensus are emerging on the FOMC, not least because of concerns over the unsustainability of the accompanying lower-for-longer-levels of volatility!

Why does this matter?

It leaves the Fed looking schizophrenic. Either they really are worried about the spillover effects of leaving policy too easy for too long, and try to do something about it; or they consider it something that can be cleaned up afterwards, when the real economy is booming.

To reconcile this puzzle, the key focus remains wage inflation. Only when that turns higher does it appear that Janet will relax enough to take the foot off the free money accelerator.

In July 15th’s Monetary Policy Report, that time is still some far away, it would seem, as this chart demonstrates.wages US

Why Yellen is King not Carney

Given the Humphrey-Hawkins testimony only comes but twice a year, it’s no wonder that financial markets expect some kind of signal from the Chair of the Federal Reserve. They only have a certain number of interest rate-setting meetings per year, and with a speech they can deliver much more of a nuanced message. Indeed, in these days of forward guidance, with interest rates seemingly permanently stuck at zero, these occasions take on even more significance.

Step forward Janet Yellen, Queen of Communication. She gave a speech in November 2012, entitled “Revolution and Evolution in Central Bank Communications”, saying:

“A growing body of research and experience demonstrates that clear communication is itself a vital tool for increasing the efficacy and reliability of monetary policy. In fact, the challenges facing our economy in the wake of the financial crisis have made clear communication more important than ever before. Today I’ll discuss the revolution in thinking about central bank transparency and how, pushed by the unique situation precipitated by the financial crisis, the Federal Reserve has responded with fundamental advances in communication. Indeed, I hope that one of the legacies of this difficult period is a permanent and substantial advance in Federal Reserve transparency” http://1.usa.gov/1zHSkEy
After years of gnomic utterances from Greenspan, and a frankly harassed and nervous delivery from Ben Bernanke, this indeed looked revolutionary. She’s going to tell us what to do!, screamed the market, breathing a not insubstantial sigh of relief. After years of rumours and intrigue, which collided with the constant noise of social media like Twitter, an exhausted market wanted someone to show it the way forward.

Thank god. Particularly when the exit from zero rates is on the cards just as we worry whether the world economy can take it.

Yet the market should be careful what it wishes for. Mark Carney’s Mansion House speech showed what happens if you’re caught on the wrong side of understanding a central bank’s reaction function.

That event has left a cautious market even more cautious. Volatility may be low, but only nervousness can accompany reaching 2007 levels of low.

Hence the question of when Yellen will “do a Carney”. When will she signal that first rate hike?

The market would be better served by considering whether she will “do a King”. Mervyn came into office promising boring central banking. Here’s his speech from January 2000:

“transparency should lead to policy being predictable. Hence a successful central bank should be boring – rather like a referee whose success is judged by how little his or her decisions intrude into the game itself.” http://bit.ly/1nvoGs1

Janet might want to remind herself of Mervyn’s speech 7 years later, when they unexpectedly raised rates:

“Looking behind the stunned surprise in the headlines, much of the reaction to our latest decision was that it was only too clear why rates needed to be raised.” http://bit.ly/1oH4dC2

Boring doesn’t always work out as boring as you hoped…

Carney ‘are you getting the message yet’?

Spot the difference:

Carney tells 5 News: ‘“We expect interest rates are going to start to increase [but] they’re not going to go to the levels they did in the past and they’re going to go there slowly.’

Radio 4 interview: ‘ “When we get back to normal, the old normal is not the new normal. The Bank of England, which is now at half a percentage point, would have moved historically to something akin to 5 percent. Financial markets, their estimation about out three years, is around let’s call it 2.5 percent’

Treasury Select Commimttee: ‘     As the economy progresses, the time to normalise interest rates is edging closer, it’s coming closer. But what is most relevant is that those adjustments will be to a level of interest rates, through a gradual process that is likely to be materially lower than historic averages.”



Quality quotes from new BOE MPC member #andrewhaldane

Andy Haldane joined the MPC this month after all his financial stability work (which might come in useful). Some choice quotes below from his first big speech – and if you like cricket you really should read it all!. He even uses the expression that businesses have rediscovered their mojo. Ever heard that from a central banker before…??

On QE: ‘It is impossible to know for sure how the economy would have performed without this extra-ordinary monetary medicine. But the Bank’s estimates suggest it may have been more than 6% smaller than it is today. In money terms, we as a nation would have been between £80-100 billion poorer – roughly, the GDP of Yorkshire and Humberside. As defensive measures go, then, UK monetary policy for the past few years has been positively Boycott-ian’

On rate rises: ‘When the first rate rise does come, it will be because the economy has recovered sufficiently to thrive on smaller doses of monetary medicine. A normalisation of interest rates would signal the economy having returned to the hospital ward, after six years in intensive care. The economy would be switching channels, from ER to Casualty. That is something to welcome, not fear.’

On taper tantrum: ‘This had a striking impact on the US housing market, with housing sales 7% lower than a year ago and residential investment falling in each of the last few quarters. This raises the possibility of borrowers reacting more sharply to rate rises now than in the past. Hence the enigma.’

On inflation: ‘The most extraordinary dose of monetary medicine perhaps ever-witnessed has been administered to a patient now whistling their way around the hospital ward. An over-reaction to the drugs cannot be ruled out.’ ‘Yet at the same time, the inflationary risks posed by such a scenario should not be over-stated…. Inflationary ghosts are hard to find.’

On the “corridor of uncertainty”: ‘It is not difficult to see why this choice over timing is a difficult one. The policymaker in this situation faces the self-same dilemma as the batsmen facing a ball pitching in the corridor of uncertainty. In that situation, the coaching manual no longer offers a clear guide.’

And finally… On GDP: Data on the economy is riddled with uncertainties and beset by revisions. A few weeks ago, we awoke to discover that we as a nation were £65 billion better off than we had thought, courtesy of the Office for National Statistics. Alas, my excitement soon gave way to mixed emotions: this windfall was in part the fruits of charitable, drugs and prostitution-related activities, previously under-recorded. What a party that must have been.’



When is a kitchen sink not a kitchen sink?

Negative depo rates! A fixed rate 4yr LTRO with 10bp spread and few conditions attached that could be worth 1.2trillion Euros! Extending fixed allotment! Extending collateral eligibility! Suspending (the supposed shibboleth) of sterilisation of SMP!


And… The Euro ends the day where it started. The Bund and Eurostoxx just about rally. Vols sell off.