Currencies

Dollar rises as markets turn eyes to Opec

European bourses are mirroring a tentative Asia session as the dollar continues to be supported by better US economic data and investors turn their attention to a meeting between Opec members. Sentiment is underpinned by US index futures suggesting the S&P 500 will gain 3 points to 2,207.3 when trading gets under way later in […]

Continue Reading

Banks

Basel Committe fail to sign off on latest bank reform measures

Banking regulators have failed to sign off the latest package of global industry reforms, leaving a question mark hanging over bankers who complain they have faced endlessly evolving regulation since the financial crisis. Policymakers had hoped to agree the contentious new measures at a crunch meeting held in Chile this week, but a senior official […]

Continue Reading

Banks, Financial

Banking app targets millennials who want help budgeting

Graduate debt, rent and high living costs have made it hard for millennials to save for a house, a pension or even a holiday. For Ollie Purdue, a 23-year-old law graduate, this was reason enough to launch Loot, a banking app targeted at tech-dependent 20-somethings who want help to manage their money and avoid falling […]

Continue Reading

Economy

Eurozone inflation climbs to highest since April 2014

A welcome dose of good news before next week’s big European Central Bank meeting. Year on year inflation in the eurozone has climbed to its best rate since April 2014 this month, accelerating to 0.6 per cent from 0.5 per cent on the back of the rising cost of services and the fading effect of […]

Continue Reading

Financial

Wealth manager Brewin Dolphin hit by restructuring costs

Profits at wealth manager Brewin Dolphin were hit by restructuring costs as the company continued to shift its focus towards portfolio management. The FTSE 250 company reported pre-tax profits of £50.1m in the year to September 30, down 17.9 per cent from £61m the previous year. Finance director Andrew Westenberger said its 2015 figure was […]

Continue Reading

Categorized | Banks, Currencies

Central banks are not all-powerful


Posted on September 20, 2016

A pedestrian walks past the Marriner S. Eccles Federal Reserve building stands in this photograph taken with a tilt-shift lens in Washington, D.C., U.S., on Tuesday, Sept. 1, 2015. Bill Gross said the Federal Reserve has waited so long to raise interest rates that any move now may be labeled "too little too late" as market turmoil restricts the room for policy makers to act. Photographer: Andrew Harrer/Bloomberg©Bloomberg

Once again, financial markets are on tenterhooks about potential interest rate hikes by the Federal Reserve. The “will they or won’t they” debate is approaching fever pitch, accompanied by criticism about confusion caused by various Fed governors voicing contrasting views about the right timing for rate rises.

This is partly the result of the new orthodoxy that central banks should be fully transparent. But the result has been as much confusion as clarity. Transparency has fed the belief that central banks control the destinies of economies and financial markets, and that there is a clear mapping between monetary policy decisions and economic outcomes, and vice versa.

    The financial crisis and its aftermath entrenched this myth. The actions of the Fed and other major central banks prevented financial and economic implosions. Central banks have since tried almost single-handedly to prop up economic growth, fend off deflation and maintain financial stability.

    The notion that central banks are economic saviours has taken hold. So when reality falls short of this exalted ideal, central bankers face opprobrium.

    At a time of heightened economic uncertainty, financial markets look to central banks for certainty. The challenge for central bankers is to provide as much information as they can, but not set up unrealistic expectations about what they know and can deliver.

    Central banks in emerging markets face heightened challenges. They have less credibility and little margin for error. In August 2015, China’s central bank freed up the renminbi to allow market forces a greater role in determining its exchange rate. This move unleashed mayhem in currency and stock markets worldwide. A press conference was held two days after the policy shift, a lifetime in financial markets. In the interim, markets assumed the worst.

    Clearly, effective and timely communication is important. Sometimes, it can even substitute for action. But too much transparency has its own risks. Markets can create a one-way bet in currency or bond markets, complicating an already complex juggling act among multiple objectives. To prevent its currency’s value from plummeting, a central bank has two options — raise interest rates or use foreign exchange reserves to support the currency.

    Just the notion that the central bank might raise interest rates aggressively, at least briefly, in order to protect the currency helps fend off speculators. As a respected emerging market central banker once told me, some “creative ambiguity” about the central bank’s policy reaction function generates room for manoeuvre.

    The communication challenge becomes trickier when there is not a clear message. In the Fed’s case, ambiguous messages about the timing of the next rate rise reflect the ambiguity in economic signals. Low unemployment indicates a tight labour market but wage and inflation data suggest otherwise.

    Central bankers must not pay undue heed to media narratives, which are often dominated by the short-term horizons of bond traders, hedge funders and investment managers. It is of far greater consequence whether a central bank ensures price and financial stability over the longer horizons that affect ordinary peoples’ lives.

    Getting communication right is one of the biggest challenges for central bankers. For it affects both their credibility and effectiveness, which are as much about managing expectations as about direct effects on the economy and financial markets. The right approach may be to clarify where central banks plan to take the economy, but not exactly about how they plan to get there.

    The writer is a professor at Cornell University and senior fellow at Brookings