Here are some acerbic comments from SocGen FX strategist Kit Juckes on the current world of “Central Bank Anarchy” as he puts it in an email to clients.
Once upon a time, we had a whole array of rules to help think about monetary policy -the Phillips curve, NAIRU, the Taylor Rule, even MV=PY (an identity not a rule) and Goodhart’s Law (that anything a central bank targets will mis-behave like a moody teenager). But increasingly, central bankers are throwing away their playbook. In the UK and US, unemployment rate triggers chosen to frame forward policy guidance are set to be revised because they will be reached before the central banks are ready to raise rates. Even at the ECB, there is acknowledgment that the link between economic activity and inflation has ‘become more tenuous in recent years’.
I was thinking about this as I listened to Mr Carney at the BOE Inflation Report press conference and as I watched Yellen’s Confirmation Hearing for the Fed Chair yesterday. When I read Jeremy Warner in the Telegraph this morning expressing concern about the way politicians have effectively handed over the reins of macroeconomic policy-making to central bankers. I can’t help thinking that we have put our faith in people who are ‘winging it’.
There’s a flipside view to all this, which is simply that the world’s central banks have a longstanding interest in two things: Low unemployment and stable prices. And nowhere is that still being achieved. So the ongoing improvisation is what’s required of them.
In the meantime, markets are in the sweetspot, and are loving this “anarchy” as day in and day out, they’re comforted by a global economy that offers few threats while also few reasons for central banks to tighten policy.