A Bloomberg story reports on the unwillingness of major central banks to make clear what their policies are, what their targets are, and what their timing is.
Bond rates are rising in the United States and Japan. In Europe, the head of the central bank, Mario Draghi, has reversed himself. He promised “we will do whatever it takes” optimism last July. This year, the ECB has actually reduced its holdings of government bonds. It is “tapering.”
The central bankers are not being transparent. But transparency has never been a policy of central bankers. Manipulating the capital markets is their strategy, and transparency reduces the effects of market manipulation. It puts the timing of market changes back into the hands of speculators. It takes it out of the hands of central bankers.
Muddling through requires verbal muddling. The Bloomberg story did not mention this inescapable reality. Instead, it emphasized the obscurity.
Officials are struggling to spell out their visions for monetary policy, often amid a chorus of competing views. Chairman Ben S. Bernanke is trying to manage expectations about when the Federal Reserve will slow asset purchases and raise interest rates. Bank of Japan Governor Haruhiko Kuroda’s reflation-push is backfiring by driving up bond yields. European Central Bank President Mario Draghi is dashing investors’ hopes he once kindled for extra stimulus.
The muddied messaging already is roiling financial markets, threatening to undermine the confidence of investors, households and consumers and so undoing efforts by central banks to strengthen their economies. The opacity puts policy makers under pressure to improve the communication techniques they’ve been using to restrain borrowing costs.
The problem is the Federal Reserve’s long-touted but obviously nonexistent “exit strategy.”
Alan Blinder, Fed vice chairman from 1994 to 1996, said he’s “very worried” financial markets will overreact to steps by the Fed to reduce and eventually exit from its efforts to support the economy.
“I’m afraid it’s going to be worse than 1994,” when 10-year yields jumped almost 2.5 percentage points as the Fed tightened credit, said the Princeton University professor. And capital losses will be larger because the starting point for yields is lower, he added.
Policy makers are aware of the potential pitfalls. The Fed will need to “think carefully about what combination of actions and communications” it should take to head off a market overshoot once it begins “normalizing policy,” Federal Reserve Bank of New York President William C. Dudley said on May 21.
The actions are the problem: creating an artificial mini-boom with $1 trillion a year in counterfeit money. Communications will do the Federal Reserve no good, once it removes the stimulus. With or without good communications, the stock market will tank.
Bernanke may be “trying to help the market build up immunity” to future Fed actions with his suggestion that the central bank could cut back on its bond buying, said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. “This is a little verbal vaccination.”
He’s got that right! There is no verbal vaccination.
Bernanke will not speak at the Jackson Hole, Wyoming, annual junket of the regional central bankers this summer. This is the first time in 25 years that a FED chairman has not spoken. He says there is a scheduling difficulty. The media have not asked him to explain what the scheduling conflict was. The media have not asked what this clearly fake explanation is covering up.
It is clear to me who his model is: President Coolidge. Coolidge in 1928 decided to retire. Things seemed to be going well. He knew that this would not continue much longer. He left Herbert Hoover holding the bag. Silent Cal was wise to remain silent. Silent Ben is trying to match his wisdom.