Central banks across the world are experimenting with an unprecedented level of monetary stimulus and negative interest rates, ostensibly to boost growth and inflation, and push the global economy out of its malaise. But in doing so, they’re confusing investors about what they’re actually trying to achieve.
According to a note from Credit Suisse sent to clients this week, central bankers are failing to effectively communicate their aims and objectives, and as a result, investors are totally baffled.
And a majority of investors now believe central bank policy is losing its power, Credit Suisse’s research says.
“Some recent actions and statements by central banks have led to confusion about the tools and targets of policymakers,” the bank says.
“The types of questions we are hearing lately reflect investors’ confusion about monetary policy. Are policymakers out of tools? Are they dangerously targeting stock prices? Was policy ever effective in the first place?
“Believers in current central bank orthodoxies dismiss these apprehensions. The orthodoxy is inflation targeting, and the tools to achieve it, even at the zero bound and following quantitative easing, include more asset purchases, more forward guidance, more negative rates, and fiscal cooperation,” said analysts led by James Sweeney in the note, titled “Inflation Targeting + Volatility Phobia = Confusion.”
As Credit Suisse points out, one of the biggest confusions in the financial markets right now is caused by the massive sensitivity central bankers seem to have when it comes to volatility. Here’s the bank again (emphasis ours):
Policymakers’ volatility sensitivity is confusing investors into thinking that inflation goals have either been subordinated or have become insuperable. We think policy behaviour is constrained by a fear of future volatility and that this fear is symmetrical. In other words, fiscal-monetary coordination is taboo because it would create too much inflation, leading to destabilizing bubbles and volatility, but aggressive responsiveness to above target inflation is also unlikely because it would also give rise to destabilizing asset price declines and capital flows/FX moves.
… We believe policymakers are so scarred by the events of 2008 that they live in constant fear of anything resembling a recurrence.
Not only are investors confused, they’re also losing faith in what the likes of the ECB, the Fed, and the Bank of Japan can actually achieve, and see monetary policy as becoming less effective.
According to the note, Credit Suisse surveyed clients — including money managers, hedge fund bosses, banks, and insurance companies — on their feelings about monetary policy, and the conclusions weren’t exactly positive (emphasis ours):
In our recent macro conference we asked the audience about their perceptions of the effectiveness of monetary policy in the major economies. As seen in Figure 1, 85.8% said that monetary policy is “losing traction” or “pushing on a string,” up from 63.9% last year. Amazingly, only 3.2% thought monetary policy is “a powerful macro management tool.”
Here’s Figure 1, showing that confidence in the efficacy of monetary policy is seriously waning:
Central bankers have been increasingly forced into defending their policies in recent months, with ECB president Mario Draghi particularly prominent in his defences. At the ECB’s last meeting Draghi told reporters that: “Overall, our measures in place since June 2014 have clearly improved borrowing conditions for firms and households.” He also said, in an interview with German newspaper Bild, that the ECB’s “policy is working, but we must be patient; investor confidence has not yet been fully restored.”