Officials who have been known for their secrecy are now speaking out about the course of monetary policy with striking candor. They should think about the consequences.
India’s central bank chief is so certain that raising interest rates again soon is a “no-brainer.” Only the dates and magnitude were not included in the forecast. That’s how detailed policymakers’ prescriptions have become around the world. Central bankers, who have long been stereotyped as dour mandarins who like to hedge their bets, have discovered the value of declarative pronouncements. They should think about the implications.
Governor of the Reserve Bank of India Shaktikanta Das, as straightforward as he appears, is on the receiving end of swiftly changing central bank communications. The urgency of the fight against inflation has pushed normally reserved policymakers to unprecedented levels of candor. While more knowledge is generally preferable to less, such transparency entails risks. If a course correction is necessary as a result of, say, mounting signs of a recession, the change will be abrupt. The tougher and more abrupt the turn becomes the more policy intents are flagged in advance.
It’s a worrying trend if forthrightness is being used to suppress debate.
Most central banks are required by law to make decisions through policy committee meetings that are held on a regular basis. Solo acts can be problematic when the stakes are so high. Prior to the rise in inflation, banks were criticized for being too insular and fixated on their models and forecasts. Officials admitted to being astonished by inflation’s strength and persistence. What role do pre-announcements in blog postings, testimony to lawmakers, and interviews play in fostering healthy discussion and reducing groupthink?
Chiefs of central banks appear to have decided that this is an issue for another day. President Christine Lagarde of the European Central Bank dropped a bombshell in a blog post just hours after Das made his remarks in an interview with CNBC TV18.
She said that the ECB will begin raising rates in July and will be done with negative rates by the end of September. Some colleagues were irritated by her preemption, as they desired more robust early steps. Inflation in the euro zone is presently at 7.4%, far more than the aim of around 2%.
While Lagarde’s statement was unusual in the context of the ECB, which has been criticized in the past for its slow decision-making, the message’s content was standard on a larger scale. Last month, when sitting on a panel with Lagarde in Washington, Federal Reserve Chair Jerome Powell fired a broadside of his own.
I would say 50 basis points will be on the table for the May meeting, he told the forum.
Powell, of course, knew that putting his reputation on the line meant a 50 basis-point increase was more than a possibility. On May 4, the Federal Open Market Committee (FOMC) raised the benchmark rate by that amount. Powell said at his news conference that day that similar measures were in the works for the FOMC meetings in June and July. In an interview with the Marketplace public radio show the next week, he reinforced his request. Is he going to announce smaller increments if the forecast changes significantly?
In difficult circumstances, it’s completely fair for someone to show leadership. Chaos is the last thing the public needs.
The Fed has a lot of speakers on the road, but not all of their viewpoints are important. The chair, vice chair, and head of the New York Fed are the people to keep an eye on. However, there has always been a procedure, debate, and, at the very least, the pretense that choices are made by committee with a public vote.
When you consider that not long ago, there was a case for retiring or scaling back forward guidance, this reversal is astonishing. After the 2008 financial crisis, this degree of communication was elevated to an art form, with the goal of assuring the public about the course of borrowing rates months or years in advance. It was only conceivable because the horizon appeared to be clear: the low-inflation era had arrived. Despite the enormous easing during the global financial crisis, price rises have remained flat.
Covid was a demand shock at first. This gave policymakers even more confidence in stressing job growth from easy money above inflation caution.
The forward guidance, I think overall, on the margin, slowed the response of the Fed to the inflation problem, Former Fed Chair Ben Bernanke told CNBC recently. In retrospect, yes, it was a mistake and I think they agree.
Governor Philip Lowe of the Reserve Bank of Australia was on to something when he announced a thorough review of forward guidance earlier this month. He wants to look into how it’s been utilized in the past and how it’ll be used in the future. Given how rapidly inflation caught up with him and how abruptly he had to change strategy, it’s the least Lowe can do. Lowe has been putting off a move until 2024 for most of last year.
Central bankers have recently highlighted the importance of being agile, even humble. That’s all right. Recent mistakes necessitate a dose of humility. It’s difficult to reconcile it with judgments being made in late September. Wim Duisenberg, the first president of the European Central Bank, made a devastating comment in 2001:
I hear, but I do not listen.