Some of the world’s most prominent central bankers may have to hope the pen is as mighty as the sword.
With the US Federal Reserve, the European Central Bank (ECB) and other authorities in industrialized countries already stretching the limits of monetary policy, pressure has risen for them not go any further, and even to begin pulling back.
Top officials have had to rely increasingly on speeches — not always successfully — to convey to financial markets how they intend to manage their economies.
“A new policy regime characterized by jawboning is now here,” TD Securities economist Eric Green said. “Policy is more constrained and more accommodation increasingly problematic in scope and complexity.”
As US Treasury yields began to rise late last month on signs of an economic recovery, US Fed Chairman Ben Bernanke gave a speech that focused on the weakness of the labor market. Stocks and bond markets rallied on hopes that this meant he was gearing up for a third round of quantitative easing, or QE3. The following week, the release of minutes from the Fed’s meeting last month painted a much more hawkish picture, with a dwindling number of voting members on the Federal Open Market Committee — just two of 10 — actively considering more stimulus.
The news prompted Vincent Reinhart, a former Fed staffer now at Morgan Stanley, to sharply revise down his forecast for the prospects of QE3 to just one-third from two-thirds.
Then, just a few days later, data showed the pace of job creation halved last month from previous months, reviving some of the bets on more Fed action. However, economists said policymakers would not read too much into one’s month data.
“This transparency thing is completely new to the Fed. They are making it up as they go along, and they’re confusing people,” said Steve Wyatt, a professor of finance at Miami University’s Farmer School of Business.
A string of Fed officials, including Bernanke, will speak at public appearances this week, so investors could be in for another rollercoaster.
It’s not just in the US that the effort to talk down rising interest rates is taking hold.
In the eurozone, the ECB’s injection of more than 1 trillion euros (US$1.31 trillion) in loans to banks seems to be as much additional support the region’s recession-threatened economy can hope for.
However, ECB President Mario Draghi has made it clear he will not be pressured into tightening monetary policy quickly.
While at pains to assuage concerns among a German-led group of ECB policymakers about inflation, Draghi dismissed a Bundesbank push to begin preparing to reverse course.
“Any exit strategy talking for the time being is premature,” he said, adding bluntly: “I think the president of the ECB is the one who has the last word on this.”
Unless the global economy suffers a new shock, such as a sharp slowdown in China, policymakers may have to rely on providing verbal guidance to markets rather than resort to another round of measures, such as bond purchases or loans to banks, to boost liquidity.
Even the governor of a central bank that does look set to ease further, the Bank of Japan, has warned that an overreliance on bond purchases might be interpreted by financial markets as a backdoor government bailout.
Bank for International Settlements general manager Jaime Caruana echoed concerns that governments were being allowed to put off the pain of fixing their balance sheets.