Central Bankers Have Lost the Plot on Messaging
(Bloomberg Opinion) -- It’s a big week for central bank meetings, with the U.S. Federal Reserve on Wednesday, the Bank of England Thursday and the Bank of Japan wrapping it up on Friday.
My plea is that they keep it simple. Central bank messaging really doesn’t have to be as difficult as it has become lately — with a plethora of jargon-infected initiatives adding to investors’ pain. This isn’t the time to communicate intentions unclearly, nor to introduce confusing and unnecessary new policies. Give it to us straight; it’ll be easier in the long run.
The European Central Bank’s meeting last week was a perfect example of what to do and what not to do. The initial statement provided all the reassurance the markets wanted. The pace of the ECB’s pandemic quantitative easing program would be “significantly raised” to counteract a recent rise in bond yields. Nothing more was needed.
Unfortunately the press conference afterwards by ECB President Christine Lagarde only muddied the waters as she tried to explain a new “multi-faceted and holistic” approach to maintaining favorable financial conditions. I’ve yet to find a cogent explanation of what that means.
This was compounded by an increasingly common habit of central banks: post-meeting “sources” trying to tweak the message conveyed. A more hawkish-sounding leak — insisting that most ECB policy makers had no intention of expanding the size of the emergency stimulus program, and had agreed only to speed it up — caused German bunds to swiftly unwind their earlier price gains.
It was also implied that QE can only be ratcheted up or down at the quarterly ECB meeting, which isn’t the flexibility the pandemic program promised. These mixed messages on the ECB’s resolve to stem rising borrowing costs will inevitably heighten price volatility. It also gives the impression that the governing council is not united. Defeat was snatched from the jaws of victory.
Fed Chair Jay Powell has been almost as frustrating in his market communications. He’s been sphinx-like in his refusal to comment on rising yields, no doubt with one eye on trying to deflate speculative bubbles.
The Fed is putting its faith in a nebulous concept called “flexible average inflation targeting” — essentially letting the economy run hot and letting price gains go above the official 2% target. But without a specific timeline or an indication of how much inflation is too much it becomes meaningless. The rout in bond markets has seen five-year U.S. Treasury yields more than double since the start of the year. Keeping schtum or hiding behind vague concepts only works for a short time.
The Bank of England is far from innocent in its mangled communications. It has tied itself in knots over whether it’s willing to take its benchmark rate negative. Though at least Governor Andrew Bailey was clear, in an interview Monday, that the recent yield rise reflects optimism about the economy.
The need to complicate things appears to be contagious. Since September 2016, the Bank of Japan has successfully controlled 10-year government bond yields with a modicum of flexibility. Yet a review expected on Friday has precipitated a selloff that required Governor Haruhiko Kuroda to pour cold water on some of the wilder expectations of what will change. What was the value of having the review at all? A simple and effective policy has become confusing.
We are at an economic inflection point of emerging from a deep recession into what might be super-strong growth led by vast government spending packages. This poses a dilemma for central banks, which have grown used to being the sole tip of the stimulus spear for more than a decade.
How do they quietly extract themselves from the battle without causing an implosion in unstable markets hooked on unlimited QE and rock-bottom policy rates? This is why it’s paramount for the Fed and the rest to keep it simple over where they see the balance of risks. Huge change deserves as much clarity as possible.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.
©2021 Bloomberg L.P.