2013-02-26 13:27:09
Rich-world central banks explore more doveish strategies
Feb 23rd 2013 | TOKYO AND WASHINGTON, DC |From the print edition
FOR four years rich-world central banks have done their best to rejuvenate
economies with conventional and unconventional monetary policy. Now, with
short-term interest rates still stuck near zero and their balance-sheets
stuffed with government bonds, the central banks of America, Britain and Japan
are experimenting with a shift in approach: coupling monetary action with
commitments designed to alter the public s expectations of interest rates,
inflation and the economy. The sense of change is reinforced by the prospect of
new leaders at the Japanese and British central banks, and the increasing
prominence of several doves at America s.
A more doveish stance would entail tolerating higher inflation, at least
temporarily, in pursuit of higher output: a significant shift given the primacy
central banks have long given to low inflation. Bond investors have begun to
price in higher inflation (see chart). But just how far each central bank is
prepared to go is still uncertain.
In Japan, Shinzo Abe, the prime minister, has used the term regime change to
describe the Bank of Japan s (BoJ s) agreement to raise its inflation target to
2% from 1%, and pursue it with unlimited asset purchases. There are
expectations for even more forceful action once Masaaki Shirakawa, the current
governor, and his two deputies depart on March 19th. Under Mr Shirakawa the BoJ
bought lots more assets, but critics said he undercut the positive impact by
repeatedly saying they were not enough to end deflation and by restricting the
maturity of bonds the bank bought.
Mr Abe is expected to nominate Mr Shirakawa s successor by the end of February.
The three front-runners, in ascending order of doveishness, are Toshiro Muto,
Haruhiko Kuroda and Kazumasa Iwata. The first two are former finance-ministry
officials; Mr Muto and Mr Iwata are former deputy BoJ governors. The latter may
be Mr Abe s favoured choice, although Mr Kuroda, head of the Asian Development
Bank, is considered to have the most global experience. In a recent interview
with The Economist, he said the bank must do anything and everything to hit
its 2% target.
But putting deflation-fighters at the helm may not overcome the bank s inherent
conservatism. Minutes of the bank s January policy-board meeting showed some
members had misgivings about their ability to hit the 2% target. Masamichi
Adachi of J.P. Morgan says the new leaders may fail to deliver the aggressive
easing that foreign investors seem to expect.
Mark Carney, who will become governor of the Bank of England in July, has
fuelled hints of a regime change of his own, saying that central banks should
regularly review how they achieve their policy goals and that in exceptional
circumstances there might be a case for temporarily targeting nominal GDP (ie,
output unadjusted for inflation). But he has yet to endorse that as an
alternative. At a parliamentary committee on February 7th, he indicated support
for simply allowing inflation to stay above target for an extended period.
Adam Posen, a former member of the bank s monetary-policy committee who now
heads the Peterson Institute for International Economics, a think-tank, says Mr
Carney s background does not suggest a radical break. Both the Bank of England
and the Bank of Canada, which Mr Carney now heads, target 2% inflation but
allow temporary deviations in support of growth. Inflation has run above the
BoE s 2% target for most of the past eight years. At its last meeting on
February 7th the bank s monetary-policy committee said it may continue to do so
for two more years, yet a third of its members, including Sir Mervyn King, the
outgoing governor, voted for more quantitative easing, or QE.
Nonetheless, both Mr Carney and the Treasury are interested in re-examining the
bank s mandate. That could lead, if not to a nominal-GDP target, to an even
more flexible interpretation of the inflation target that justifies keeping
rates lower for longer.
The Federal Reserve has had a mandate since the 1970s to pursue both full
employment and low inflation. In practice, inflation came first. But in a
statement clarifying its long-term goals and strategy a year ago, it said that
when there was a conflict between pursuing lower inflation and higher
employment, it would balance the two, focusing on whichever was furthest from a
satisfactory level. It later put that strategy into practice by promising
unlimited QE until employment had substantially improved, then setting a 6.5%
threshold for unemployment before it would consider raising interest rates.
Although Ben Bernanke, the chairman, has presided over this shift, its most
outspoken champions are a handful of doveish officials in particular Charlie
Evans, president of the Chicago Fed, and Janet Yellen, the Fed s vice-chairman.
Her views draw particular attention as she is part of the Fed s leadership, was
responsible for producing the strategy statement, and is a front-runner to
succeed Mr Bernanke should he retire next January.
In a 2012 speech Ms Yellen laid out a theoretical path to meeting the Fed s
dual goals that would allow inflation temporarily to drift above its 2% target
(it is now 1.3%). Economists at Goldman Sachs compared this to a nominal GDP
target that would leave rates near zero until 2016, a year longer than the Fed
has indicated.
How such views will shape the Fed s actual policies is unclear. Ms Yellen has
not endorsed a higher inflation target or nominal GDP target. The minutes of
the Fed s January policy meeting suggest growing tension between officials
desire for lower unemployment and concerns that prolonged monetary easing could
fuel financial speculation and complicate an eventual exit from stimulus.
Officials plan to review the current pace of QE in March.
There is also a question-mark over what this wave of central-bank
experimentation can achieve: since bond yields are already so low, the marginal
return to coaxing them even lower may be scant. For now, though, buoyant
stockmarkets are giving the activists the thumbs-up.
From the print edition: Finance and economics