The gathering of central bankers at Jackson Hole in late August has become one of the fixed points in the economic calendar. An informal meeting of monetary policymakers and prominent economists, it has been staged by America’s central bank since the early 1980s at a resort overlooked by mountains in Wyoming—and often offers a juicy story to a news-starved financial press. Mario Draghi, president of the European Central Bank (ECB), notably used the venue in 2014 to make the case for drastic action to stimulate the moribund eurozone economy and avert the risk of deflation. That paved the way for the ECB’s momentous introduction of quantitative easing (QE) in early 2015, when it finally adopted the post-crisis policy of buying financial assets with freshly created central-bank money which was pioneered by America’s Federal Reserve in late 2008.
This month’s symposium offered more modest fare. Since the Fed phased out its QE purchases of financial assets in 2014 and is poised to reduce its holdings, most eyes were on Draghi again, looking for hints about when the ECB might in turn start to taper away its QE buying programme now that the eurozone economy is doing so much better. On this occasion he disappointed the watchers—though they won’t have to wait that long, since the ECB’s governing council will hold its next monetary-policy meeting on 7th September, after which Draghi will be quizzed by the press. For her part, Janet Yellen, head of the Fed, revealed little new other than deep disquiet about the Trump administration’s misconceived plans to loosen the regulatory reins on banks that were belatedly tightened after the financial crisis of 2007-08.
The “investors braced for Yellen and Draghi signals,” in a Financial Times headline, could have spared themselves the trouble and sat back in their seats. Yet the attention lavished on Jackson Hole in the run-up as well as during the actual event shows once again just how crucial central bankers have become in post-crisis economies. If the financial press slavishly covers every word that they utter this is because the markets hang on every small nuance that may reflect a change in policy direction. A speech given in June by Draghi at the ECB’s version of Jackson Hole, held in the Portuguese resort town of Sintra, reverberated through bond and currency markets fearful that it indicated an earlier than expected reduction in monetary stimulus, forcing officials at the central bank hastily to insist his remarks had been misinterpreted.
“The chumminess of central bankers encourages groupthink and dogma”The art of Kremlinology may have died with the Soviet Union but it has been reborn in a new guise among the cadre of central-bank watchers employed by banks around the world. Among central banks themselves, the skill of communicating their policy stances has never been more important. Traditionally they have been tight-lipped: Bernard Rickatson-Hatt who was in effect the Bank of England’s first press officer reputedly sought to keep the press out of the Bank and the Bank out of the press during the 1940s and 1950s. But now central bankers have discovered the power of the word in markets driven by expectations of what they next have in mind.
The intense focus on central bankers is unhealthy, for two main reasons. First, making sense of what they say is far from straightforward. Often, their remarks are actually attempts to sway opinion in the committees that take decisions, which may not succeed. A case in point was when the ECB failed to deliver as much extra stimulus at the end of 2015 as Draghi had appeared to indicate was on the way, owing to opposition within the governing council. Even explicit communication through “forward guidance” tying future monetary policy to an economic yardstick such as unemployment can be treacherous. The Bank of England offered such a guideline when Mark Carney took over from Mervyn King as governor in 2013, but it had to be discarded when the jobless rate fell much faster than expected.
Second and more important, the obsession with central bankers indicates just how reliant investors have become on ultra-loose monetary stances that buoy asset prices. Nicholas Macpherson, who was permanent secretary at the Treasury when the Bank of England adopted QE in March 2009, summed up the concern about this in a recent tweet: “QE like heroin: need ever increasing fixes to create a high. Meanwhile, negative side effects increase. Time to move on.”
Central bankers are a new international priesthood. Getting together in an informal way at events such as Jackson Hole and Sintra is no bad thing if it provides a genuine forum to challenge prevailing central-bank doctrines. But the very chumminess of central bankers also encourages groupthink and dogma. Before the financial crisis they collectively put too much emphasis on curbing inflation and not enough on the growing risks to financial stability. In copycat fashion one after another has embarked upon large-scale bond purchases. Now they may all find that withdrawing the drug of QE is a lot harder than prescribing it in the first place.
