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(From L) Janet Yellen, Mario Draghi and  Mark Carney at the event in Frankfurt, Nov. 14.
(From L) Janet Yellen, Mario Draghi and  Mark Carney at the event in Frankfurt, Nov. 14.

Top CBS Vow to Talk Investors Out of Easy Money

Top CBS Vow to Talk Investors Out of Easy Money

Four of the world's top central bankers promised Tuesday to keep openly guiding investors about future policy moves as they slowly withdraw the huge monetary stimulus rolled out during the financial crisis. The banks pumped some $10 trillion into financial markets since the 2008 crisis—driving many markets to record highs.
But now the US Federal Reserve, European Central Bank, Bank of England and Bank of Japan are trying to wean investors off easy money without causing an upset. To do this, words will be key, the heads of the four central banks told an ECB conference on communication, RTE reported.
It is called forward guidance in banker-speak, essentially warning gently of what is coming.
"Forward guidance has become a full-fledged monetary policy instrument," ECB President Mario Draghi said in Frankfurt. "Why discard a monetary policy instrument that has proved to be effective?" Mario Draghi and his three counterparts are at very different stages in roll-back process.
The Fed is looking at its fifth rate increase and the Bank of England raised its own rate this month for the first time in 10 years.
But the ECB is merely reducing the pace of its bond purchases, and the Bank of Japan is still printing money at full speed, although it has signaled that no additional stimulus is likely.
US Fed Chair Janet Yellen agreed with Draghi that guidance has been beneficial "on balance" but stressed it should always be viewed as depending on how the economy actually develops. "All guidance should be conditional and related to the outlook for the economy," the outgoing Fed chief said.
Banks such as the ECB often say the envisage doing something but reserve the right to change their mind if circumstances change. History shows that preparing the ground for a withdrawal of stimulus is not always easy.
In 2013, the Fed chair at the time--Ben Bernanke—famously sent global bond markets into a tailspin by suggesting that bond purchases could be reduced. In the event, the "taper tantrum" meant bond buys would not be reduced for another 10 months.
Draghi had his own mini-tantrum in June when he hinted that the ECB's policy could be tweaked to reflect stronger growth. The market sell-off that followed was so big that  the eventual scaling back of purchases was relatively small and drawn out.
Bank of England Governor Mark Carney's guidance on the path for interest rates has also repeatedly been knocked off course by surprises in the economy, prompting one politician to call him an "unreliable boyfriend".
Speaking alongside Yellen and Draghi, Bank of Japan Governor Haruhiko Kuroda said the best way to avoid misunderstandings was to keep the message simple. "It should better be straightforward," he said. "That's the best way."

 

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