The State of International Central Banking as Powell Era Nears
The club of central bank chiefs Powell is set to join has been making plenty of news.
(Bloomberg) -- It was President Donald Trump who dominated the headlines in monetary policy over the past 10 days with his choice of Jerome Powell to chair the U.S. Federal Reserve. Yet the club of central bank chiefs the American is set to join has been making plenty of news.
The Fed, now helmed by Janet Yellen, left itself on course to raise interest rates again in December, and Governor Mark Carney’s Bank of England lifted its benchmark for the first time in a decade. European Central Bank President Mario Draghi announced plans to slow bond-buying in 2018.
With the exception of the Bank of Japan, most key central banks are starting to reverse their emergency stimulus as economies surprise to the upside. Deutsche Bank AG reckons the world is now experiencing the fewest number of recessions on record.
But with inflation still weak, the name of the game will be prudence.
“You have more synchronized, more widespread global expansions,” said Larry Hatheway, chief economist at GAM Holding AG in Zurich. “Adjustment is here, but adjustment can also be gradual.”
Here’s a wrap of some of the themes shaping central banking over the past two weeks:
Robust Growth
The Fed said for the first time since January 2015 that U.S. activity is “solid,” and Carney noted the “global economy is firing on most cylinders” even though his is restrained by Brexit. Draghi suspects there may be more “growth surprises.’’
Economists surveyed by Bloomberg have bumped their forecasts for global growth this year three times and now expect a 3.5 percent expansion.
That run gives central bankers room to start removing the ultra-easy monetary policy of the past decade.
Prudence Plea
They are nevertheless proceeding carefully.
The Fed speaks only of “gradual adjustments in the stance of monetary policy,” while the ECB kept quantitative easing open-ended and isn’t expected to raise rates before 2019, even as it halved monthly purchases.
Carney anticipates just two hikes over the next three years in the U.K., and the Bank of Canada is promising to be “cautious” after hiking in July and September. The Czech central bank raised rates on Thursday too but said it would go slow in future.
“The monetary-policy cycle has turned but it is turning very slowly,” said Peter Dixon, an economist at Commerzbank AG in London.
Bank of Japan Governor Haruhiko Kuroda said he wouldn’t even begin to discuss pulling back stimulus so long as price growth remains well below his target.
“Diverse inflation outcomes around the world imply diverse monetary policies,’’ said economists at Cornerstone Macro LLC.
Missing Wage Growth
A key reason for central banks’ patience is inflation, which is undershooting most targets with the exception of the U.K. Sluggish wage growth despite falling unemployment is partially to blame.
Andrew Haldane, the Bank of England’s chief economist, labels weak salary gains one of the “hardest” puzzles, and the ECB said it didn’t see any “encouraging” evidence yet of a rebound. Kuroda had a stab at trying to explain the phenomenon, arguing one of the challenges is to convince companies and consumers to believe in faster inflation in the future.
Still, most central bankers are betting historical patterns will re-emerge and that tightening labor markets will eventually spur prices. Yellen says her “best guess” is that inflation will take off, while the Bank of England is betting wage growth will average more than 3 percent over the next three years.
No Tantrums
Central bankers are still relying on the power of words to convey their plans to markets in the hope of avoiding tantrums even as they move to tighten the grip.
Investors appreciate the effort. Neither the ECB’s slowing of quantitative easing nor the Fed’s signal of an upcoming hike ruffled markets. By promising no change in stance is near, Kuroda also kept the calm in Japan.
In the U.K., investors were a bit surprised by Carney’s cautious approach in which he raised the benchmark but indicated a follow-up was some way off. The pound fell to a four-week low versus the dollar on Friday.
Not all are chatty, however. Having slashed interest rates, Brazil’s central bank said it will no longer hint at future moves, preferring instead to maintain “freedom of action.”
New Normal
It’s still unclear what the future of central banking will look like, but most agree neither balance sheets nor interest rates will ever return to their pre-crisis levels.
Bank of Canada Governor Stephen Poloz pointed out his economy “is likely to respond to higher interest rates more than it did in the past.”
Central banks’ mandates are also under review. In New Zealand -- the birthplace of inflation targeting – the government wants to put the labor market at the heart of monetary policy.
Key to the future will be Powell when he takes over the Fed in February. He is viewed as likely to maintain Yellen’s gradual approach to tightening monetary policy, but he may not be as much of a fan of quantitative easing in the next slump.
--With assistance from Simon Kennedy
To contact the reporters on this story: Carolynn Look in Frankfurt at clook4@bloomberg.net, Catherine Bosley in Zurich at cbosley1@bloomberg.net.
To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Jana Randow, Fergal O'Brien
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