Coronavirus: Fed, RBA, RBNZ — all move fast

The coronavirus pandemic is giving birth to a new doctrine in central banking. What matters most isn’t transparency or forecasts, but the ability to move quickly.
One of the big themes coming out of the global financial crisis was the idea that central banks should flood the zone with information — be it dot plots, forward guidance, statements, interviews or tweets. The Federal Reserve was a leader in developing that paradigm, varying degrees of which were adopted throughout the world. The challenge is that, in a crisis, monetary authorities must be able to move swiftly, without being hemmed in by their previous messaging. While actions of the past few days have been decisive, weeks passed with mixed messages.
Now the Fed, which slashed rates close to zero on March 15 as part of a dramatic series of steps to shore up the economy and broader financial system, may be dismantling the very system it created. Within hours, central banks in Australia and New Zealand responded with radical measures of their own that flew in the face of the relative policy calm projected fairly recently. The Bank of Japan (BOJ), which brought forward to March 16 a policy meeting scheduled for later this week, increased its purchases of exchange-traded funds and introduced a new lending programme. Japan had been adding liquidity to markets, but with official rates already negative, many considered the central bank more constrained. Indeed, the BOJ kept its main rate at minus 0.1% and kept its target for the 10-year bond at about zero.
These early demonstrations of resolve — with little regard to previous signalling — speak not only to the rapidly evolving Covid-19 outbreak, but the need for an overhaul of central bank communication. There was no indication at many recent policy meetings that such steps were necessary, let alone contemplated. Fair enough; few could have predicted how quickly the coronavirus would upend considered forecasts and carefully calibrated trajectories of borrowing costs. The emergency steps we’re seeing now are a healthy corrective.
Investors are taking note: “We consider it unwise to hold central banks to their prior communications in fast-moving markets where economic conditions and prospects are deteriorating rapidly,” said Andrew Ticehurst, a rate strategist at Nomura Holdings Inc. in Sydney. Benchmark US Treasury yields slumped as much as 30 basis points on March 16, as equity futures tumbled.
In a conference call with reporters, Powell was asked whether he’d be releasing the Fed’s economic forecasts. Technically, they were due at the Fed’s March meeting later this week, which had been moved forward. Powell said there wasn’t much point in submitting estimates that could be quickly overcome by events, and that they may even become an obstacle. If the Summary of Economic Projections returns at all, it should be highly conditional. The Fed probably needs to emphasize the numbers are little more than a best guess.
This might all seem fairly arcane when thousands are dying and economic life on the planet faces serious challenges. But as the first line of defense, central banks’ responses are greatly consequential. Remember that monetary policy can be enacted faster and with less mess than fiscal policy, which tends to involve legislative trade-offs. The approach to the former is essentially being reinvented on the fly.
—Bloomberg