SUMMARY
  • The Tipping Point for Central Banks
  • The Fed Begins The Great Unwind
  • The Bank of England Barks Again

When my son began playing soccer, he fell into the habit of blaming every unfortunate outcome on match officials. In his telling, every goal he allowed was attributable to a missed offside call or an uncalled foul. The apparent injustice was overwhelming.

To provide perspective (and to generate earnings for college), I signed him up for training to become a referee. Two days in the classroom gave him an appreciation for the laws of the game, but the real education came when he first donned the striped jersey. As he adjudicated events on the field, he became the object of sideline vitriol. He came to realize that expecting infallibility on the part of officials is unreasonable, and his complaints dwindled to a precious few.

In the financial arena, investors often blame unfortunate outcomes on officials within the world’s central banks. Their grievances are many: central bankers don’t communicate well, they have the wrong objectives and they sometimes veer into places they don’t belong. The criticism has reached a fever pitch as monetary policy seeks to retreat from the programs that were implemented after the financial crisis. But some perspective is in order.

Historically, central banks are most at home when in the background. Their central function—regulating the supply of money in the economy—has not traditionally attracted much attention outside academic circles. Central bankers said little, kept their balance sheets small and didn’t comment on asset price levels. Officials typically shunned the limelight and avoided making statements that could be construed as guidance. Alan Greenspan once famously said, “…if I turn out to be particularly clear, you’ve probably misunderstood what I said.”



This all began to change about thirty years ago, when public interest in financial markets began to rise. Savers became investors as bank products no longer captured their wallets or their imaginations. At about the same time, media coverage of business took off, with the creation of several 24-hour news networks covering that space. Discussions of central banking became a staple in the effort to fill all of that air time.

Central bank officials were, at first, chary about entering the media maelstrom. Sound bites are antithetical to the more nuanced analysis required to explain the economy. Data is noisy and requires careful interpretation. And, let’s face it: most central bankers haven’t received much training in forms of modern communication.

Inflation targets were adopted to provide a framework for internal and external central bank conversations. The “2% solution,” an export from the Reserve Bank of New Zealand, quickly took hold in the largest developed markets. Targets are intended to anchor inflation expectations, and provide a high-level guide to monetary policy. (If inflation is running below target, the tendency would be to ease; excessive inflation would prompt tightening.)