Central banks are increasingly entering the world of politics

Yesterday brought a barrage of central banking news. So let us start with something rather remarkable from the head of the world’s number one which is the US Federal Reserve. The crucial part of the speech given by Jerome Powell to the National Association for Business Economists is below.

The expansion is still far from complete. At this early stage, I would argue that the risks of policy intervention are still asymmetric. Too little support would lead to a weak recovery, creating unnecessary hardship for households and businesses. Over time, household insolvencies and business bankruptcies would rise, harming the productive capacity of the economy, and holding back wage growth. By contrast, the risks of overdoing it seem, for now, to be smaller. Even if policy actions ultimately prove to be greater than needed, they will not go to waste. The recovery will be stronger and move faster if monetary policy and fiscal policy continue to work side by side to provide support to the economy until it is clearly out of the woods.

Some of the economics is really rather dubious. But the main driver is that he is interfering in a political decision which is fiscal policy in the middle of an election campaign. It used to be considered the the Federal Reserve would go into a type of purdah during an election campaign but apparently not now. In the past that would usually mean a period where interest-rates would not be changed.The situation is somewhat different now as interest-rates have already been reduced so close to 0% so the weapon of choice would be more QE bond buying but the principle is the same.

The Economics

The claim that the risk of overdoing policy actions is small is familiar territory for central bankers. But this is really rather extraordinary.

Even if policy actions ultimately prove to be greater than needed, they will not go to waste.

Such a situation would be likely to be one exhibiting inflation. The inflation would be most likely to be in house and other asset prices but none the less would be there, albeit it would be ignored by the main consumer inflation measures.

Also if we look at the opening speech we see some familiar cheerleading for policy.

As the coronavirus spread across the globe, the U.S. economy was in its 128th month of expansion—the longest in our recorded history—and was generally in a strong position.

So strong in fact that “Moderate growth” is considered to be “slightly above-trend”

We travel a similar journey if we look at his view of the recovery which is quite a success.

After rising to 14.7 percent in April, the unemployment rate is back to 7.9 percent, clearly a significant and rapid rebound.

But then there is quite a bit of slip-sliding away.

A broader measure that better captures current labor market conditions—by adjusting for mistaken characterizations of job status, and for the decline in labor force participation since February—is running around 11 percent.

I have pointed out more than a few times how and why the international definition of unemployment has failed us in this pandemic. So it is more than disappointing to see a central banker who should know better using it. In a familiar theme that is the behaviour of a politician.

Meanwhile if we switch to actual politicians the fiscal stimulus call had a bit of trouble with The Donald.

Nancy Pelosi is asking for $2.4 Trillion Dollars to bailout poorly run, high crime, Democrat States, money that is in no way related to COVID-19. We made a very generous offer of $1.6 Trillion Dollars and, as usual, she is not negotiating in good faith. I am rejecting their request, and looking to the future of our Country.

Top of the Class

The ECB decided to issue a career enhancing discussion paper yesterday.

Despite this renewed debate, traditional indices of central bank independence do not suggest a deterioration in central banks’ de jure independence after the GFC. ( GFC = Global Financial Crisis)

Lewis Carroll would be proud. Although there is a brief flash of insight.

The benefits of central bank independence are currently not obvious for many citizens,

Really?! However we return to a place “far,far,away” in the section on the ECB itself.

There have been no visible changes in either the de jure or actual independence of the ECB. The legal frameworks protecting the ECB’s independence have been tested,
and have served to establish its independence more firmly.

Meanwhile back on the ranch the ECB has a President who is a politician and former French Finance Minister and a Vice-President who is the former Economy Minister of Spain. So independence from political control has been established by er, putting politicians in charge! It does at least explain this bit.

Comments by euro area governments on the ECB’s policy decisions are unusual.

Why would then when it is doing their bidding? After all if monetary policy was more overtly under the control of politicians how much more could they have done?

If we switch to the Bank of Russia we get a laugh out loud section. We are assured this.

Central bank independence seems to be observed in Russia, although it was not tested in a controversy with the government in the analysed period.

The idea of independence under Vladimir Putin seems not far off insane which somewhat bizarrely they then confess.

In January 2015, the head of monetary policy was reportedly replaced by a person more acceptable to
bankers, who had called for lower interest rates.

Seems to be a similar model to Roman Abramovich at Chelsea football club albeit no manager there survives for that long.

Interest-Rate Cuts

Just when you though that this game might be over there is an early premonition of Halloween. From the Wall Street Journal.

European Central Bank President Christine Lagarde said the bank is ready to inject fresh monetary stimulus to support the eurozone’s stuttering economic recovery from the Covid-19 pandemic, including by cutting a key interest rate further below zero.

Just as a reminder the Deposit Rate and the Current Account Rate are already -0.5%. Last time this came up for discussion ( about a year ago) it was about a move to -0.6%. Does anybody believe a 0.1% move would make any difference right now?

Insane in the membrane
Insane in the brain!
Insane in the membrane
Insane in the brain! ( Cypress Hill )

There are three issues with this. The first is simply that the evidence is that this does not work as otherwise why so we need ever more doses of it? This leads her to an official denial and we know what to do with them.

ECB hasn’t yet reached the point where a fresh interest-rate cut would do more harm than good, known to economists as the reversal rate. ( WSJ)

Next comes the international impact as another interest-rate cut would affect countries which explicitly ( Denmark) and implicitly (Switzerland) set their interest-rates against the Euro exchange-rate. Thirdly we are pretty much back to trying to devalue the Euro which relates to the point before.

Comment

The problem here is that central banks have found themselves behaving like politicians.The move towards independence did not last long as the various establishments shifted towards appointing people who were and are “one of us”. That is most explicit at the ECB where an actual politician in Christine Lagarde is President. In the United States we have seen a different tack where Jerome Powell was seemingly pressurised by President Trump to do his bidding and cut interest-rates. Neither looks especially independent. As to fiscal policy in the US President Trump may already be switching his tune.

If I am sent a Stand Alone Bill for Stimulus Checks ($1,200), they will go out to our great people IMMEDIATELY. I am ready to sign right now. Are you listening Nancy?

That is the problem with playing politics as it can change daily and indeed hourly but the economy cannot.

Rather ironically a day which started with Jerome Powell calling for more like Oliver Twist and the President saying what? just like The Master in the story had another turn. Until then US bond yields were rising ( 30 year at 1.6%) meaning that we might actually see some of the promised Yield Curve Control. But the Trump Tweet ended that at least for now.

30 thoughts on “Central banks are increasingly entering the world of politics

  1. Even the usually compliant media seems to have given up on ideas about economics driving policy – yesterday, they were all saying the main US share markets had fallen 1.5% simply because the Orange One had ruled out a stimulus until after the November election.

    If the US economy has been growing for nearly 11 years, why would it need yet more support? It is the opposite side of the question of why continue these cuts/bond buying if it hasn’t actually worked for the same period.

    It is inevitable that just as politicians drive the so-called independence of the central banks, so the CBs should become involved in politics. With the failure of monetary policy to do anything but drive up asset prices, the CBs now need the politicians to act on fiscal policy to actually do anything about consumption demand growth. Step forward our own bumbling idiot looking as much like Caucescu at his last speech in 1989 as the Orange One did on the WHite House balcony. He announced a new “market” (ha, ha) in fixed term mortgages at 5% deposit to enable youngsters to buy property – as if this mentality did not cause the mess in the first place. At the same time, he announced a new “magic” method to solve the care home issue – yes, that means insurance premiums, payable of course from income to further “help” current consumption. It all proved too much for one mortgage broker, who rang James O’Brien’s radio show to tell us that the banks were the masters of mortgage lending policy (albeit forgetting the “guarantees” Boris will add) and that all that govt policy of printing money had achieved was to ramp up asset prices, so people had no spare money for consumption. No talk of supply-demand mythology (let alone blaming immigrants). If these guys are openly admitting it, maybe reality is dawning? It is going to get bumpy both sides of the Atlantic at the end of this year.

    • Hi Dave

      Yes suddenly 5% deposits are fine which is the opposite of financial stability because lower deposits are being used at higher house prices. If the Halifax was tight earlier house prices are 7.3% higher than a year ago. So we are back to Insane in the Membrane.

      Still with the Dow Jones up nearly 2% today perhaps a US stimulus package is back on….

      • Well, the rise was prompted by the Donald’s tweet at 1411 BST about stimulus cheques. Looks like fiscal moves as monetary have clearly not stimulated the economy.

  2. And when not if UBI is introduced(when the Fed and other central banks start paying money DIRECTLY into peoples accounts to counter the deflation which they say is killing us)with either cash or central bank digital coins, freedom is all over, they can stop payments to you for any perceived infringement of their laws and policies, that could be anything from not wearing a mask, denying climate change, denying covids lethality, complaining about mass uncontrolled immigration, posting any thing negative online or on social media regarding the above, in short anything that is anti globalist and against the tyranny being imposed on you, how political will central banks be then?
    By co-operating with this covid scam people are giving them the green light to go ahead with it, don’t say you weren’t warned.

    • Kevin, I concur with your perspective. I am a disciple of the death stats, something that Boris woke me upto in the spring. I note that UK deaths have been and are on the 5 year average for 4 months in a row. (what pandemic you might ask?).

      It’s bout something else. The reset if there is one, will be human curfew combined with UBI digital currency. If there isn’t one, a continuation of Rentier wealth combined with endless asset pumping (just what we have enjoyed 20 years now).

      CB’s are key to both solutions though.

      Paul

      • Paul,
        There is another more lethal perspective to the coming central bank control, assuming stocks will be bought by central banks eventually, again not if but when, there is the creeping element of state control over even corporate decision making, assuming again that it is only a matter of time before the government/central bank then insist on them having a member on the board considering the huge stake they are taking in the company and the degree of influence that sake entitles them to, they will then start to enforce their political ideologies on the running of that company, think BLM, LGBTQ+, racial quotas, green initiatives and policies, anti white hetero/nationalist policies, the whole gammut.
        Again the control of the state and the corporate world will merge via the control exerted by central banks, communism is coming.Central banks won’t be just entering the world of politics, they will be controlling it completely, overtly instead of the current sham system of perceived democracy.

        • ” . . . instead of the current sham system of perceived democracy.”
          Quite right.
          “Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens
          Martin Gilens and Benjamin I. Page
          Each of four theoretical traditions in the study of American politics—which can be characterized as theories of Majoritarian Electoral Democracy, Economic-Elite Domination, and two types of interest-group pluralism, Majoritarian Pluralism and Biased Pluralism—offers different predictions about which sets of actors have how much influence over public policy: average citizens; economic elites; and organized interest groups, mass-based or business-oriented. A great deal of empirical research speaks to the policy influence of one or another set of actors, but until recently it has not been possible to test these contrasting theoretical predictions against each other within a single statistical model. We report on an effort to do so, using a unique data set that includes measures of the key variables for 1,779 policy issues. Multivariate analysis indicates that economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while average citizens and mass-based interest groups have little or no independent influence. The results provide substantial support for theories of Economic-Elite Domination and for theories of Biased Pluralism, but not for theories of Majoritarian Electoral Democracy or Majoritarian Pluralism. “

          Click to access gilens_and_page_2014_-testing_theories_of_american_politics.doc.pdf

        • Kevin, I think we are there already. I watched some commentary on Renegade Inc. last night.

          In Communism, all the big factories were inefficient and loss-making. The central Govt handed out top-ups and the workers were paid. if poorly. The money was accrued at the bottom in small amounts of derisory living standards.

          In Neo-Liberalsim (crony capitalism), the corporations are bust as are the banks, the money is funnelled in through the top, share buy backs with cheap money, CB purchase of shares and distribution of QE to balance sheets (banks). In this case the money flows down from the top and employees are paid a % of what is left over at the bottom.

          We are approaching a time when the difference of the two systems will be small. Hence curfew controls and propaganda is necessary. To stay safe you must…. etc.

    • Lawyer Dr Rainer Fuellmich is taking to court the head of WHO, and members of the German Medical Profession (and many others will follow), for the fraudulent representation of the Covid Flu into a world Pandemic. The use of PCR Testing which gives over 90% false positive readings and the use of these test to lockdown the world. Approximately 350 million people have so far lost their livelihoods. Many more deaths than the deaths from this flu have occured due to the lack of healthcare and mental provision. There is more to this tyranny and lockdown than many people are sleepwalking into and we need to get behind this class action so that we and our children and children’s children have a fulfilling and prosperous life. We have been lied to and manipulated by a group of drop out billionaires who want us to live under their direction as they see fit. Rainer has successfully taken to court many multinationals for fraud, Deutsche Bank and VW to name two, he also represents thousands of Dr’s and virologists around the world whose voices have been silenced regarding the misuse and diagnosis of this Flu.

      • Hello Anne, I believe what you say could be true. PCR tests are easily gamed if you whack up the CT to 40 or so. Its a process abuse. Legal recourse is of course only a choice in a democratic system. If the system is gerry-mandered such a paperwork approach is frankly “pissing into the wind”. The decision to use the Pandemic as proxy excuse to implement financial control and repression of a higher order suggests a far bigger economic fallout. No legal action can respond to something on this scale.

  3. Great blog as usual, Shaun.
    Looking on the bright side, Chairman Powell hasn’t yet taken to making his announcements side by side with the Treasury Secretary, and hopefully this won’t change. I was surprised by the rapturous response by Canadian journos to Bank of Canada Governor Poloz holding a press conference with Finance Minister Bill Morneau in the early days of the pandemic to announce special measures. One always assumes that there will be the necessary co-ordination between fiscal policy and monetary policy, but the head of a central bank should not be the cheerleader of the existing government’s fiscal policies, and arguably this was crossing a line that should not have been crossed.
    There was an op-ed in the Financial Post on 29 September, “Should the Bank of Canada follow the Fed’s inflation policy shift?” It was written by Jeremy Kronick and Steve Ambler, the monetary policy gurus at the C.D. Howe Institute. Both men have backgrounds at the Bank of Canada. They claim: “…Canada’s IT regime already has some of the features of AIT. The bank’s official target is headline inflation, defined as the rate of change of the consumer price index over 12 months. Technically, this is the same as a 12-month moving average of monthly inflation rates. AIT would simply require a change from this 12-month moving average to a window of 24 months, 36 months, or some other length. For most of us, however, a fixed 12-month period is easier to grasp than some other period of changing and uncertain length.” The 12-month rate of change is adopted as the inflation measure because it is defined based on the CPI unadjusted for seasonal variation and the 12-month rate of change is the shortest interval that will largely eliminate seasonal variation. It is close, but not the same, as a 12-month moving sum (not average) of inflation rates. For the most recent month available, August 2020, the official 12-month inflation rate is 0.1%. The sum of the monthly rates of change from September 2019 to August 2020 is 0.2%. Technically the 12-month rate of change is the rate of change derived from the product of the corresponding monthly inflation ratios. If you did go to a 36-month rate of change, you would presumably take the cube root of the inflation ratio to derive an annualized average inflation rate.
    It is just the authors’ assumption that AIT would involve a move to a 24-month, 36-month rate of change. There is nothing in Powell’s statement that would suggest this is how it would be implemented. Although the op-ed seems to shut the door on AIT, it actually seems to open it, suggesting the 12-month rate of change is not very different from a 36-month rate of change, when it clearly is. And presumably, if the 2021 renewal of the inflation-control agreement did move to AIT in this way, it would not mandate a change to “some other period of changing and uncertain length” but specifically to a 36-month span. This would tend to push up the inflation experienced by Canadian from what it has been over the last few years.
    Whether one calculates 12-month or 36-month rates of change, differences between consecutive months depend only on two months: the month exiting and the month entering the rate of change. The exit effects can be problematic. In March 2011, the annual CPI inflation rate for Canada soared from 2.2% to 3.3%, largely the result of the end of the 2010 Olympic Games a year earlier, which caused a big drop in Vancouver hotel prices in March 2010. This drop was part of the February 2011 annual rate, but not the March 2011 rate.
    The annualized 36-month rate of change for March 2013 is 2.1%, up from 2.0% in February 2013. Again the exiting month would be March 2010. Because the time span is three times as long the impact is smaller, but the direction of change is again due to the Vancouver hotel price drop at the end of the 2010 Olympics leaving the inflation measure. Exit effects are difficult to explain and justify to users even in the annual case. In the 36-month case they would simply seem bizarre. How do you justify the target inflation rate going up due to something that happened more than three years ago?

    • “How do you justify the target inflation rate going up due to something that happened more than three years ago?”

      we are talking Bankers here , anything will do

      Next they will be using Astrology ……. ( if not already )

      Forbin

      • yup, just used the Astrology app ….

        apparenlty Bankers are ” full of Taurus ” and are ” like a Cancer ” *

        Forbin

        *( stolen from Dilbert )

      • Forbin,

        The North West will follow I know a lot wont agree with the restrictions but I don’t think you can let the virus spread.

        The Isle of Man got it right sending people to prison if they break restrictions.

        I know some say its no worse than the flue but the flue generally doesn’t affect as many organs in the body neither the brain.

        Kate Garraway’s husband got multiple organ and brain damage and I for one wouldn’t want to end up like that as I live up North and am at a risk group of over 70.

        In the meantime and off topic Halifax house prices now up 7.3% on the year which I know some on here will have a lot to say about all this.

        Will they fall in double digits next year?

        By rights they should but there is a demand in many places particularly for houses with gardens and applications are up.

        To also get tongues wagging Tipton building society offering a mortgage of 99% ov valuation if someone else can be a guarantor.

        Still cheaper to buy a small house for circa £200,000 at circa 3% interest which would cost around £6,000 on an interest only mortgage if it was possible or maybe slightly higher with a repayment mortgage but not done the match.

        I estimate most small detached houses in my area up North would cost about £800 a month to rent!

        Taking account the above factors in my region its not certain imo we will see a collapse in house prices but the caveat being massive unemployment and house repossessions would tip the balance.

  4. Hello Shaun,

    I see more economic ruin for the people of Scotland – all pubs to close .

    So with no money how does Scotland afford health care ( apart from asking us – again ) ?

    oh well , I guess we’ll follow suit , glad the masks are working ……. umm apparently not well enough. ( WHO state can be 30% helpful , what ever that means )

    Forbin

          • RBS settles £5.7bn debt, but we’re still £20bn under water

            yes the one we the tax payer are held to account for

            in any split between Scotland and the rest of the UK this has been one of the talking points , who gets the debt?

            oh and I see I was partly wrong , Spainish companies own some of the windmill farms

            oh well

            Forbin

    • oh yes the report does not contain all of the appropriate data on long term effect

      example 10% may suffer but after 12/24 months they are projected to recover

      also that approx 85% of deaths are in the over 65

      but then again 83 % of who die each week are over 65 anyway ….

      stuff like that

      we shall see

      Forbin

      PS: the other untold story is that SARS2 deaths are declining despite the rise in cases world wide ( ever thats slowing down ) . By March/April projections are that deaths will be zero or close to zero

      * all proections and models are wrong – some are userful

    • I doubt this has been published without government consent – their Behavioural Insights Team have probably said to publish an article about this to appease the dissenters. I signed the declaration today.

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