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Lagarde’s Gaffe Puts ECB Chief in Elite Club for Market Stumbles

Lagarde’s Gaffe Puts ECB Chief in Elite Club for Market Stumbles

(Bloomberg) -- Christine Lagarde’s verbal faux pas on Thursday puts the European Central Bank chief in a distinguished club of global monetary officials whose words have inadvertently roiled financial markets.

The president’s comment that it’s not her institution’s job to close bond spreads seemed to undermine previous pledges to defend the integrity of the euro area, and sparked a record jump in Italian yields. That remark might yet earn a label as the gravest of such errors, though events surrounding the global panic could equally make it a mere footnote of the current crisis.

Lagarde’s Gaffe Puts ECB Chief in Elite Club for Market Stumbles

“The ECB, like every central bank, is supposed to prevent disorderly markets,” Paul Donovan, global chief economist at UBS Group AG, told Bloomberg Television on Friday. “What happened yesterday was a misconstruction. Lagarde doesn’t have a background in economics -- the focus of her remarks was perhaps more political.”

Lagarde’s Gaffe Puts ECB Chief in Elite Club for Market Stumbles

It will be of scant comfort to Lagarde that few central bankers avoid an occasional slip-up, but there’s no question that she’s in good company. Former and current monetary chiefs from Wim Duisenberg to Jerome Powell have all had tricky verbal moments, underscoring not only that they’re human, but also that financial markets are fickle beasts.

Here’s a brief -- and far from exhaustive -- look at other instances in recent history where central bankers were perceived to have tripped up on verbal banana skins of their own making.

Heavy Price

Edward George, who led the Bank of England during its first years of independent monetary policy, was known more for witticisms than for unforced errors.

But a comment over lunch with newspaper executives in 1998, when he suggested that unemployment in northeast England was a price worth paying for lower inflation throughout the whole economy, provoked calls for his resignation. The comment is an honorable mention in this list, since his exit would have had market significance.

Lagarde’s Gaffe Puts ECB Chief in Elite Club for Market Stumbles

Growing Pains

The early years of the euro’s existence were tough going for the ECB. The fledgling currency went into freefall against the dollar, eventually prompting policy makers in 2000 to begin foreign-exchange interventions.

In a newspaper interview that October, then-president Duisenberg was asked if it would make sense to conduct more of them if Middle East violence weakened the euro. “I wouldn’t think so,” he replied, and the currency promptly fell again. A month later, the ECB was forced to deny that he was poised to resign.

Lagarde’s Gaffe Puts ECB Chief in Elite Club for Market Stumbles

Teething Troubles

During his first term as Federal Reserve chairman, Ben Bernanke faced teething troubles with communication. That culminated in an encounter in April 2006 with Maria Bartiromo, an anchor for CNBC at the time, at the White House Correspondents’ dinner.

In a private conversation, he told her that investors had misinterpreted his comments to Congress that seemed to suggest the Fed was finished raising interest rates. Bonds fell when CNBC reported the remark. He later called it a “lapse of judgment.”

Lagarde’s Gaffe Puts ECB Chief in Elite Club for Market Stumbles

Type of Thing

Janet Yellen had her own baptism of fire in 2014 with her first press conference as the Fed chair who succeeded Bernanke.

She defined the “considerable” time that the would follow after the end of quantitative easing, and before its first interest-rate increase, as “six months, or that type of thing.” Investors seized on the comment, which prompted an awkward spike in bond yields.

Lagarde’s Gaffe Puts ECB Chief in Elite Club for Market Stumbles

Mountain Air

Bank of Japan Governor Haruhiko Kuroda, attending the World Economic Forum in the Swiss alpine resort of Davos in January 2018, discussing prospects for achieving his 2% inflation goal, told a panel there that “I think we are finally close to the target.”

The yen strengthened as much as 1% after the remark, and then pared that after clarification from a spokesman. Kuroda meant that inflation would reach the target “around fiscal 2019” and that his remark wasn’t any different from the central bank’s view released a few days earlier, his official insisted.

Lagarde’s Gaffe Puts ECB Chief in Elite Club for Market Stumbles

Major Challenge

Lagarde’s U.S. counterpart, Jerome Powell, hasn’t stumbled over words during the current crisis, but he previously perplexed investors with his shifting choices of words. In October 2018, the Fed chair described borrowing costs as “a long way from neutral,” then said the next month that rates were “just below” estimates of neutral.

He caused market ructions in May last year, dismissing a deceleration in prices as “transitory” only six weeks after describing low inflation as “one of the major challenges of our time.” Stocks fell and the dollar rose as traders pared bets that the central bank’s next move would be a rate cut.

To contact the reporter on this story: Craig Stirling in Frankfurt at cstirling1@bloomberg.net

To contact the editors responsible for this story: Simon Kennedy at skennedy4@bloomberg.net, Zoe Schneeweiss, Alister Bull

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