Central bankers have lost the plot on messaging

It’s a big week for central bank meetings, with the US Federal Reserve on Wednesday, the Bank of England Thursday and the Bank of Japan wrapping it up on Friday.
My plea is that they keep it simple. Central bank messaging really doesn’t have to be as difficult as it has become lately — with a plethora of jargon-infected initiatives adding to investors’ pain. This isn’t the time to communicate intentions unclearly, nor to introduce confusing and unnecessary new policies. Give it to us straight; it’ll be easier in the long run.
The European Central Bank’s meeting last week was a perfect example of what to do and what not to do. The initial statement provided all the reassurance the markets wanted. The pace of the ECB’s pandemic quantitative easing program would be “significantly raised” to counteract a recent rise in bond yields. Nothing more was needed.
Unfortunately the press conference afterwards by ECB President Christine Lagarde only muddied the waters as she tried to explain a new “multi-faceted and holistic” approach to maintaining favourable financial conditions. I’ve yet to find a cogent explanation of what that means.
This was compounded by an increasingly common habit of central banks: post-meeting “sources” trying to tweak the message conveyed. A more hawkish-sounding leak — insisting that most ECB policy makers had no intention of expanding the size of the emergency stimulus program, and had agreed only to speed it up — caused German bunds to swiftly unwind their earlier price gains.
It was also implied that QE can only be ratcheted up or down at the quarterly ECB meeting, which isn’t the flexibility the pandemic program promised. These mixed messages on the ECB’s resolve to stem rising borrowing costs will inevitably heighten price volatility. It also gives the impression that the governing council is not united. Defeat was snatched from the jaws of victory.
Fed Chair Jay Powell has been almost as frustrating in his market communications. He’s been sphinx-like in his refusal to comment on rising yields, no doubt with one eye on trying to deflate speculative bubbles.
The Fed is putting its faith in a nebulous concept called “flexible average inflation targeting” — essentially letting the economy run hot and letting price gains go above the official 2% target. But without a specific timeline or an indication of how much inflation is too much it becomes meaningless. The rout in bond markets has seen five-year US Treasury yields more than double since the start of the year. Keeping schtum or hiding behind vague concepts only works for a short time.
The Bank of England is far from innocent in its mangled communications. It has tied itself in knots over whether it’s willing to take its benchmark rate negative.
—Bloomberg