Which would you prefer .... central bankers who talk too much, or too little ?

Wednesday 28th October 2015

Which would you prefer .... central bankers who talk too much, or too little ?

Ref : "Bank of England's Silent Officials Make Life "Tricky" for Public" Bloomberg Markets

In case anyone had forgotten, the Federal Reserve's Open Market Committee conclude their October meeting today and will subsequently be announcing their decision on rates to the world. Actually, you could be forgiven for not holding your breath for this event as it is generally agreed that there is virtually no chance them announcing a rate hike today (about 6% in fact as defined by futures markets). As ever though, the accompanying statement will be analysed to death for clues as to future policy, as will the famous (infamous?) "dot-plot" that charts the medium-term forecasts for rates by the individual FOMC members, albeit anonymously. Then presumably, the markets will wait on tenterhooks between now and the December meeting for any of those individual members to offer any clues as to the Fed's intentions, even if some of these offerings are contradictory. "Forward Guidance" in action, eh ?

The Bank of England's Monetary Policy Committee (MPC) are also meeting today, though in their case it's just for a chat  --  they don't announce their decision on rates until next week and given the softer-than-expected data of late it would be reasonable to assume that they will also be postponing any thoughts of a rate rise, probably until well into next year. If recent retail sales data was encouraging, any hawkishness is likely to have been more than stymied by a Q3 GDP growth number of just 0.5% (prev. 0.7%), and weakness in the manufacturing sector in general and in the construction sector in particular.

It's fascinating to see that the MPC, or some of the individuals on it, are copping some flak for not communicating their thought processes on the future for UK rates. Some fairly senior figures in the City have criticised deputy governors Minouche Shafik and Jon Cunliffe for not giving the markets a detailed picture of their outlook for growth, inflation and therefore ultimately for rates. We suppose that what these senior figures want to know is where these two stand in terms of hawkishness or doveishness, and how that leaves the MPC in the tug-of-war between those two factions. For what it's worth, Bloomberg rates both Ms Shafik and Mr Cunliffe as somewhere in the middle of the debate (maybe because they haven't said too much !), but that's not really the point.

Of course everyone wants to be on the inside track when it comes to predicting which way things will go, and when. But you've got to be careful about exactly what you wish for. Are the critics seriously suggesting that all members of the MPC should be emulating their counterparts at the Fed's FOMC ? If so, that might come as a surprise to the many commentators across the globe who have tired of various Fed officials offering contradictory views. The accusation is that in doing so, rather than offering us all pointers to the way ahead, they have in fact confused the situation and have contributed to the volatility that has postponed the very rate hike that some of them desire.

And what about this "forward guidance" ? The principle of a central bank informing the markets of its thinking in order to smooth the way for an orderly sequence of events without shocks is a sound one. The trouble is that when circumstances don't pan out as expected, the forward guidance can turn out to be a rod for the central bank's back. Would the Fed have raised rates earlier this year if it hadn't been for the feeble Q1 GDP numbers hit by unforeseen weather and strike problems ? Of course .... and just as certainly they would have moved in September if it hadn't been for the global turmoil unleashed by China's unexpected currency devaluation. The fact is that if you repeatedly state your intentions and keep failing to fulfil them (even for totally understandable reasons), you can end up looking weak, or incompetent, or both.

Unfashionable though it is, sometimes saying nothing may just be the wisest course.