THE recent firehose of opinions spilling forth from officials at the Federal Reserve, European Central Bank (ECB), and Bank of England (BoE) has been as unedifying as it is unhelpful. Given the febrile state of financial markets and the collective failure of the economic community to clear even its own low bar when it comes to pretending to see the future, policymakers would be advised to pipe down.
Following the post-pandemic surge in inflation, there’s been a collective consensus to move away from explicit forward guidance on monetary policy, replaced by a meeting-by-meeting data-dependent outlook. That’s a practical approach to a highly uncertain economic backdrop, and is to be welcomed. But it is falling apart, and is having the unwelcome side-effect of making fixed-income markets more volatile (albeit exacerbated in recent days after the collapse of Silicon Valley Bank), something policymakers should know to avoid.
My colleague Mohamed El-Erian took direct aim at Fed Chair Jerome Powell on Wednesday for the bluntness in his opening statement at the semiannual congressional testimony. Powell revived the prospect of a 50 basis-point hike at the next Federal Open Market Committee (FOMC) meeting on March 22. That’s a head-spinning shift after the US central bank downscaled to just a quarter-point raise at its last meeting on Jan. 31. Powell was forced to add a big “if” at Thursday’s repeat testimony, emphasizing that nothing is decided until February’s inflation and payroll reports are scrutinized. That’s as it should be; data, not Fed testimony, should set the tone.
Moreover, the FOMC makes a collective decision on policy, and while individual views are part of the process, regional Fed presidents should not dominate. Instead, vocal hawks such as St. Louis Fed President James Bullard (a non-voter this year) and Minneapolis Fed President Neel Kashkari (voter) are stealing much of the oxygen in airing their particular opinions. If policymakers have new insights to add on a specific economic approach, then let’s hear from them — but not if it is to bang the drum of their latest hot take on where interest rates should be. That is for the collective decision-making forum of the central bank, not for mass broadcast.
This is far from just a Fed problem. Following calls for an additional 200 basis points of tightening from Austrian central bank chief Robert Holzmann last week, Bank of Italy Governor Ignazio Visco made his displeasure clear. “Uncertainty is so high that the Governing Council of the ECB has agreed to decide ‘meeting by meeting,’ without ‘forward guidance,’” he said. “I therefore don’t appreciate statements by my colleagues about future and prolonged interest rate hikes.”
We hear from President Christine Lagarde at the post-meeting press conferences, and from Chief Economist Philip Lane if there is an important qualification on ECB policy. While national central bank chiefs should be free to opine on the state of the economy in their respective countries, and occasionally on the broader picture, setting interest-rate policy across 20 nations is all about the art of the compromise. What might seem necessary for Austria might not be the case elsewhere across the euro zone. Persistent calls for higher and longer rate hikes from such influential ECB policymakers as Bundesbank President Joachim Nagel make an already difficult task almost impossible.
The BoE is also struggling with policymakers having wildly divergent views. Two external members of the nine-person Monetary Policy Committee, Swati Dhingra and Silvana Tenreyro, voted for no change at the last two meetings when rates were raised by 50 basis points. A third outside member, Catherine Mann, has been calling for even faster hikes. Her comments on the risks posed by the potential for further weakness of the pound stray into an area which central bankers normally avoid, for good reason: Discussing currency values opens a political can of worms.
By contrast, we hear only infrequently from the Bank of Japan policy board — limited to just a four speeches last month — so when the governor does speak it carries more weight. Moreover, comments are usually couched in language designed to reveal little, as central banking should not be all revealing. Steering the economy requires subtlety and nuance.
The current torrent of rhetoric is enough to make me yearn for the opaqueness of former Fed Chair Alan Greenspan. Discretion is a useful tool in the central bank armory; it should be more valued. Some things are better kept within a committee which makes collective decisions, rather than aired for all to dissect. Less really is more sometimes.