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Thursday, 19 October 2017

On the Fed, BoE and ECB

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Anthony Peters on how “St. Mario” is the central banker most under fire. 

Anyone who thought that the year hadn’t really go going yet can now safely get excited, stand up and watch for the ECB and the BoE as their respective monetary policy committees meet today - and then sit down again.

Anthony Peters columnist format

Anthony Peters

SwissInvest strategist

Nothing dramatic is on the cards.

Nevertheless, the two institutions are facing very different economic environments. That the UK is rebounding nicely is not news and the worst that investors can expect from the MPC is a gentle back-pedalling by Carney the Magician in terms his hopefully fading love affair with forward guidance. It is no secret that I was never impressed with the idea of central banks speculating on the future course of the economy to such an extent as to lead them to issue long term monetary policy forecasts which is what forward guidance effectively represents. Central bank pro-activity is both desirable and laudable but they also need to be able to react swiftly and decisively to global ebbs and flows and their influence on the shifting sands of parochial economies.

Draghi and his merry men are looking at falling inflation with all its concomitant problems.

Given the lamentable state of the global economy in the aftermath of the sundry crises of the past seven years, pronouncing that ultra-low key rates will remain unchanged for a goodly while does not require a fancy policy of forward guidance; it simply needs an occasional excursion away from the ivory tower in which central bankers feel so comfortable.

Janet Yellen has already revised the unemployment target trigger point away from the 6½% set by Ben Bernanke down to 5½% and I have little doubt that Carney will soon be binning his 7% target too. For all the criticism I have levelled in the past few years at the rarely lamented Alan Greenspan and especially at his total misreading of the destructive power of imported disinflation, I believe his sphinx-like behaviour (“I guess I should warn you, if I turn out to be particularly clear, you’ve probably misunderstood what I said.”) gave the Fed a level of power over the economy and over politicians which it has now lost.

However, the man with the problem is not Carney but, also in a policy committee meeting today, St. Mario. The ECB is still faced with record unemployment at 12.1% across the eurozone with rates in Greece and Spain still in the mid 20s and with youth unemployment of biblical proportions. There might be smug satisfaction bordering on hubris in Brussels that the euro crisis is over but there is still a stark difference between the political smugness and the underlying economic reality. There might be a little wee shred of moral relief in the little known fact that pan-European unemployment has never registered below 7.3% which it did in January 2008 and that the historic average since the introduction of the single currency zone in 1999 is 9.28% but to what extent that takes pressure off the ECB is uncertain. 

Disinflation 

And this is the key point. Brussels continues to rely on Frankfurt to keep the ship afloat. While the politicians are still toasting their success in staring down doubters in the single currency project and celebrating the recovery in global economic activity, Draghi and his merry men are looking at falling inflation with all its concomitant problems. Overall eurozone inflation is back below 1% and a poor reading on January 16th, say back to 0.7% seen in October, will be deeply worrying. Just two years ago in November 2011, it was at a healthy 3%. Since then it has been slipping lower and lower, ably assisted by a strengthening euro.

US Treasury Secretary Jack Lew might be touring Paris and Berlin and knocking heads together in the latter by for its export success and its people’s propensity to work hard and to save prudently – I guess he’ll next be asking Usain Bolt to run slower too – but he needs to clock that the EU has spent the last 20 years adding more and more “hinterland” as it has swept up and integrated one weak central and eastern European economy after the other. In doing so, it has, in passing, saved Uncle Sam untold billions in defence costs for which it has, so far as I can tell, received not much by way of thanks. I digress.

While the Fed and the BoE are looking at the speed at which their economies are growing and trying to formulate policies which will reverse the lax monetary conditions – and which will take the patient off the life support system without him lapsing back into a coma – the ECB is still wrestling with structural issues not of its making (and not really for it to resolve) but for which nobody, other that it, appears willing to take responsibility and which it the only authority capable of addressing.

In plain English, rates remain unchanged. 

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