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Jeremy Warner
Jeremy Warner, assistant editor of The Daily Telegraph, is one of Britain's leading business and economics commentators. He is @telegraphwarner on Twitter. Subscribe to the City Briefing e-mail.
Does anyone believe a word central bankers say?
By Jeremy Warner Economics Last updated: July 18th, 2013
55 Comments Comment on this article
Is forward guidance of the type that Mark Carney, the new Governor of the Bank of England, is plainly set on, a realistic substitute for quantitative easing? I'm sceptical, though I'm not quarreling with the idea that more QE would likely do more harm than good.
Minutes to the last meeting of the Monetary Policy Committee reveal a marked shift away from QE, with nobody on the MPC voting for more asset purchases.
This may be no more than a holding position, while the new man at the wheel tries to work out exactly what it is the Bank of England should be doing. The new strategy is expected to be revealed with next month's Inflation Report. But the overwhelming assumption is that Carney wants to replace balance sheet expansion with forward guidance.
Here's why I've got my doubts.
The most basic of forward guidance is what the Bank of England already does. It produces an Inflation Report which charts where inflation and output are expected to be on the basis of current policy. But of course, these forecasts have in recent years proved to be hopelessly wrong.
Policy, on the other hand, has basically been kept the same – ie. incredibly loose – leading to confusion over what the Bank is trying to target.
There is clearly some merit, then, in the Bank spelling out precisely what it is hoping to achieve, as argued by Simon Wren-Lewis, professor of economics at Merton College Oxford in this blog.
This brings us onto the second most basic form of forward guidance, which is to commit to a future path for interest rates. Such guidance has been used by Mr Carney at the Bank of Canada.
It has also been deployed by the US Federal Reserve, and most recently by Mario Draghi, president of the European Central Bank.
But it only works if people actually believe it, and just as important, think the central bank is prepared to back words with actions. It is not clear, for instance, that the central bank can get long term interest rates (long bond yields) to fall simply by saying that this is what it wants to see happen. In the end, the markets will test the central bank's resolve, forcing it into asset purchases so as artificially to generate the interest rates it wants.
By indicating a timetable for tapering and then ending QE, Ben Bernanke, chairman of the US Federal Reserve, pretty much lost control of interest rates, forcing him into a grovelling series of clarifications. These are scarcely any more convincing. The distinction Bernanke makes between interest rates, which he wants to stay low into the indefinite future, and QE, is an entirely false one, for QE is merely the mechanism for keeping long term interest rates low.
The ECB is quite likely soon to face this test with its its promise of "outright monetary transactions", or its commitment to keep sovereign bond yields in eurozone countries low through asset purchases. So far, the promise has proved remarkably successful. Sovereign bond yields have generally fallen even though the ECB has not bought a single bond. The belief that the ECB is prepared to fire up the printing press to make these purchases has been good enough.
But with political crisis in Portugal and beyond, this faith is beginning to erode. Periphery bond yields have risen markedly of late. What does the ECB do when once more they reach the danger zone, especially if political crisis in the afflicted country means there is no government to agree the sort of conditionality which is meant to accompany OMT purchases?
The same problem afflicts other forms of forward guidance. There is no point in the Bank of England saying it thinks rising interest rates "unwarranted" unless ultimately it is prepared to engage in QE to anchor them where it thinks they should be.
There's very little research that I can find on the extent to which people believe what central bankers say. Anecdotal evidence suggests that business and finance is more prepared to accept at face value what policymakers say than households. Yet if you cannot persuade households that interest rates will remain low for several years, thus prompting them to loosen the purse strings a bit, then there is not much point in saying it.
In any case, the starting point must be a clearer definition of what policy is trying to achieve. At the moment, the Bank of England pretends to be targeting inflation, but in reality it seems to pursuing nominal GDP growth, albeit not very successfully.
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Jeremy Warner, assistant editor of The Daily Telegraph, is one of Britain's leading business and economics commentators. He is @telegraphwarner on Twitter. Subscribe to the City Briefing e-mail.
Does anyone believe a word central bankers say?
By Jeremy Warner Economics Last updated: July 18th, 2013
55 Comments Comment on this article
Is forward guidance of the type that Mark Carney, the new Governor of the Bank of England, is plainly set on, a realistic substitute for quantitative easing? I'm sceptical, though I'm not quarreling with the idea that more QE would likely do more harm than good.
Minutes to the last meeting of the Monetary Policy Committee reveal a marked shift away from QE, with nobody on the MPC voting for more asset purchases.
This may be no more than a holding position, while the new man at the wheel tries to work out exactly what it is the Bank of England should be doing. The new strategy is expected to be revealed with next month's Inflation Report. But the overwhelming assumption is that Carney wants to replace balance sheet expansion with forward guidance.
Here's why I've got my doubts.
The most basic of forward guidance is what the Bank of England already does. It produces an Inflation Report which charts where inflation and output are expected to be on the basis of current policy. But of course, these forecasts have in recent years proved to be hopelessly wrong.
Policy, on the other hand, has basically been kept the same – ie. incredibly loose – leading to confusion over what the Bank is trying to target.
There is clearly some merit, then, in the Bank spelling out precisely what it is hoping to achieve, as argued by Simon Wren-Lewis, professor of economics at Merton College Oxford in this blog.
This brings us onto the second most basic form of forward guidance, which is to commit to a future path for interest rates. Such guidance has been used by Mr Carney at the Bank of Canada.
It has also been deployed by the US Federal Reserve, and most recently by Mario Draghi, president of the European Central Bank.
But it only works if people actually believe it, and just as important, think the central bank is prepared to back words with actions. It is not clear, for instance, that the central bank can get long term interest rates (long bond yields) to fall simply by saying that this is what it wants to see happen. In the end, the markets will test the central bank's resolve, forcing it into asset purchases so as artificially to generate the interest rates it wants.
By indicating a timetable for tapering and then ending QE, Ben Bernanke, chairman of the US Federal Reserve, pretty much lost control of interest rates, forcing him into a grovelling series of clarifications. These are scarcely any more convincing. The distinction Bernanke makes between interest rates, which he wants to stay low into the indefinite future, and QE, is an entirely false one, for QE is merely the mechanism for keeping long term interest rates low.
The ECB is quite likely soon to face this test with its its promise of "outright monetary transactions", or its commitment to keep sovereign bond yields in eurozone countries low through asset purchases. So far, the promise has proved remarkably successful. Sovereign bond yields have generally fallen even though the ECB has not bought a single bond. The belief that the ECB is prepared to fire up the printing press to make these purchases has been good enough.
But with political crisis in Portugal and beyond, this faith is beginning to erode. Periphery bond yields have risen markedly of late. What does the ECB do when once more they reach the danger zone, especially if political crisis in the afflicted country means there is no government to agree the sort of conditionality which is meant to accompany OMT purchases?
The same problem afflicts other forms of forward guidance. There is no point in the Bank of England saying it thinks rising interest rates "unwarranted" unless ultimately it is prepared to engage in QE to anchor them where it thinks they should be.
There's very little research that I can find on the extent to which people believe what central bankers say. Anecdotal evidence suggests that business and finance is more prepared to accept at face value what policymakers say than households. Yet if you cannot persuade households that interest rates will remain low for several years, thus prompting them to loosen the purse strings a bit, then there is not much point in saying it.
In any case, the starting point must be a clearer definition of what policy is trying to achieve. At the moment, the Bank of England pretends to be targeting inflation, but in reality it seems to pursuing nominal GDP growth, albeit not very successfully.
Read more by Jeremy Warner on Teleg
raph Blogs
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Tags: bank of Canada, Bank of England, European Central Bank, forward guidance, Mario Draghi, Mark Carney, US Federal Reserve
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lordlewy
21 minutes ago
You may have to explain what exactly "forward guidance" is.
It was never on the curriculum when I was at school, it's not one of those public school thingys that segregrates us proles from the priveledged, is it?
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MrVeryAngry
49 minutes ago
'Forward guidance'? So Carney is clairvoyant then? And to 'set out a future path for interest rates'? Eh? Er, how? Interest rates are market price. How the flying **** can he possibly know what these will be? Delusional. Just delusional.
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rupertmja
Today 03:53 PM
The BoE should just get the hell out of the way of the free market. Then, let the cookie crumbles fall where they will = a fresh start for the economy. Sure, their rich buddies will lose, but the ordinary Joe will see recovery in jobs. We need production and productivity, nothing else.
- Recommended by 5 people
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Mike77
Today 03:45 PM
Jacob H. Schiff, Paul Warburg and other bankers influenced Congress to pass the Federal Reserve Act (December 23, 1913).
The Fed central banking system is the biggest fraud the world has ever known.
America’s Federal Reserve—a private Zionist bank not government owned —lends money to America AT INTEREST.
Congressman, Louis T. McFadden said “...Mr. Chairman, we have in this Country one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board and the Federal Reserve Banks…
Congressman, Louis T. McFadden, brought formal charges against the Board of Governors of the Federal Reserve Bank system for numerous criminal acts...
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penangpete
Today 03:39 PM
No.
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peterpotato
Today 02:33 PM
Central bankers print electronic money to pay off the bad debts of their pals at the investment banks. They are involved primarily at this present time in shifting all the bad debts from the balance sheets of the banks we know and used to trust onto the shoulders of tax payers worldwide. Carney is a central banker so he is a shifty b#stard involved in a great deception that bankers, along with their pals the politicians, hope we don't notice because we are too busy watching Match of the Day and Coronation Street.
- Recommended by 9 people
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Kevin Pritchard
Today 02:31 PM
The last forward guidance I remember was the ERM
Et qu' est qu'il a dit - 'je ne regrette rien'?
KP
- Recommended by 2 people
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1066goldberg
Today 01:41 PM
I for one believe everything they say,hang on a sec,my marzipan roof is dripping and my chocolate front door is melting with the heat...... bloody hard living in a fairy tale i can tell you.
- Recommended by 8 people
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GreatBrithole
Today 01:05 PM
No.
- Recommended by 4 people
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4wales
Today 01:04 PM
No.
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franciswilliam
Today 01:02 PM
Carney has just proven he is either just here for the whack
Or maybe he was just appearing to be rational when he decides to go down the easy money route.
Perhaps Ed squared will need his printing skills so he is thinking about his future paymasters.
- Recommended by 0 person
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saffrin
Today 01:02 PM
Na'!
- Recommended by 2 people
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fried_egg
Today 12:48 PM
do central bankers believe what central bankers say? its about confidence, and talking it up... its always a tony blair grin
- Recommended by 3 people
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seemstome
Today 12:29 PM
Surely the word "Central" is superfluous in that statement?
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slic59
Today 11:59 AM
Q: How many central bank economists does it take to screw in a light bulb? A: Just one -- he holds the light bulb and the whole earth revolves around him.
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misesdisciple
Today 11:45 AM
Fiat money is the gorilla in the room.
Central bankers are only the front men for the fraud.
Eventually people will wake up.
- Recommended by 13 people
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MrBishi
Today 11:27 AM
When you are venturing further and further into the unknown, sometimes all you can say to your acquaintances is, "it's this way".
- Recommended by 3 people
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[*=1]
David
Today 12:58 PM
Wanna buy some gold sovereigns
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[*=2]
MrBishi
Today 01:26 PM
Why not, you sound an honest sort of chap.
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Denis_Cooper
Today 11:08 AM
"Is forward guidance of the type that Mark Carney, the new Governor of the Bank of England, is plainly set on, a realistic substitute for quantitative easing?"
Of course not, no amount of "forward guidance" on future base interest rates can possibly serve as a substitute for the Bank of England creating more money for the government to spend, which has always been the primary purpose and effect of QE as practised in the UK so far.
How could "forward guidance", mere words, help the government to pay its bills in the same way as £375 billion of QE has done?
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Kernow Castellan
Today 11:05 AM
Does anyone believe a word that central bankers say?
Of course. If Bernanke had not been believed about tapering, long term yields would not have shot up.
They did - ergo, he was believed.
(Of course, it may have been a stupid thing to say, and an overreaction by the markets, but it was still listened to)
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[*=1]
albatross
Today 12:03 PM
Whenever Bernanke opens his big mouth he shoots himself in the foot, and whatever he says affects the markets adversely. All economists should learn to keep their traps shut. Personally, I'd wrap them in duct tape to make sure.
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wanderingone56
Today 11:04 AM
The question in the headline is surely rhetorical. Why limit it, though, to 'central' bankers?
Given their record over the past few decades surely even bankers don't believe what other bankers say any more?
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Adrian
Today 11:02 AM
Forget all this Economics nonsense.
The central Bankers want Global armageddon, nothing will improve because the don't want it to improve, Carney's there because the other guy, Mervin, is slipping out the back door before the SHTF.
Buy Gold, Silver and maybe a Bitcoin or two.
Start stockpiling non perishable foods and water purification measures.
Begin freezing water.
http://www.youtube.com/results...
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hctroubador
Today 10:45 AM
Bernanke highlights US economy growth as the beginning of the end for the collapse. Any growth is essentially artificial and related to the asset bubble's feeding on cheap FED money. There is some real growth related to oil production, but this is a long way from hitting main street. Investment and growth is NOT happening in the real economy. It's all spin and lies all of the time.