November 10, 2017 / 12:46 PM / a year ago

COLUMN-Yellen, Draghi, Carney and Kuroda walk into a conference...: McGeever

(The opinions expressed here are those of the author, a columnist for Reuters.)

By Jamie McGeever

LONDON, Nov 10 (Reuters) - Although the process of raising interest rates and tightening monetary policy has begun, communication remains just as potent a weapon in central banks’ arsenal as their policy actions.

So no better place for four of the world’s most powerful central bankers to communicate their message on communication than a central bank forum on communication.

Janet Yellen, Mario Draghi, Haruhiko Kuroda and Mark Carney will be hoping to do just that at a European Central Bank conference “Communications challenges for policy effectiveness, accountability and reputation” in Frankfurt next week.

Cynics have long dismissed central banks’ attempts to guide markets with their words as “open mouth operations”, a reference to open market operations where the Federal Reserve shapes U.S. short-term rates by buying or selling government securities in the open market.

This criticism reached a crescendo in recent years as “forward guidance” became the policymaking rage, and central bankers tried to calm markets and business by laying out what their future monetary policy would be.

The U.S. “taper tantrum” in May 2013 was a case in point - bond yields around the world surged after Fed chief Ben Bernanke hinted that the Fed’s bond-buying program might soon be curbed. The market ructions meant that it would be another seven months before the Fed announced new bond purchases would be reduced, and another 10 months before they stopped completely.

Mark Carney and the Bank of England have also come in for intense criticism for failing to follow guidance with appropriate action. Stingingly, one UK lawmaker in 2014 labeled Carney an “unreliable boyfriend”, an epithet that has stuck.

It’s not all been negative. ECB chief Mario Draghi’s off-the-cuff remark at the height of the euro crisis on July 26, 2012 that the ECB would do “whatever it takes” to save the euro were perhaps the three most important words uttered by any central banker ever. The rest, as they say, is history.


The idea of central banks using communication with financial markets as a policy tool flourished in the Alan Greenspan era.

On the one hand, the Fed chief famously sought to obscure his message through “purposeful obfuscation” in order to minimize any market volatility his utterances might spark. But the Greenspan Fed also sought to guide markets and businesses with the code-like use of certain words and phrases.

In the early 2000s the Fed repeated it would be “patient” on keeping interest rates low for a “considerable period”. Once it started raising rates in 2004 it made it clear that rates would rise at a “measured pace”, or 25 basis points per meeting.

Here though, transparency led to complacency. Bubbles, borrowing and leverage were building in many markets, the catastrophic consequences of which would start to play out in 2007.

The fledgling European Central Bank with Jean-Claude Trichet at the helm had its own code too. When he uttered the words “strong vigilance”, an interest rate hike would almost always follow.

The global crisis of 2007-09 and recession it sparked had a profound effect on central bank communication. Policy overwhelmingly and understandably erred on the dovish side, and where it didn’t - such as the ECB’s rate hike in 2011 - has widely been considered a policy error.

Trillions of dollars of quantitative easing stimulus and years of zero - in some cases, negative - interest rates was central banks’ collective response to the crisis. This action was underpinned by their words, the commitment to keeping policy ultra-loose for as long as was deemed necessary, a la Draghi’s “whatever it takes”.

Although inflation remains mostly below target, economic growth is close to its cycle peak and central bankers are still scarred by 2008, the days of emergency policy are generally over. The slow road to policy “normalization” has begun.

The quartet taking the stage together in Frankfurt will be on a panel entitled: “At the heart of policy: challenges and opportunities of central bank communication”, and investors will be hanging onto their every word for what comes next. Or so you would think.

It’s worth remembering that all four will may soon be yesterday’s men (and woman). Yellen will be replaced as Fed chair in March next year, Carney and Draghi’s terms are up in 2019, and only this week a senior aide to Japanese prime minister Shinzo Abe recommended that Bank of Japan governor Kuroda not be reappointed.

What they say today may not be what their successors preach or practice tomorrow. (Editing by Toby Chopra)

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