There is light at the end of the tunnel for a very lackluster global economy, but crawling out from the depths of recession is going to be tough, and central bankers have to guide the whole world out — not an easy task for a country, let alone a handful of individuals. As economic data in crucial parts of the world strengthens — manufacturing in the United Kingdom and Germany, employment in the United States, and growth in Japan — it’s looking like 2013 could be the year momentum starts to rally and growth gains become more substantial as time passes.
Yet central bankers have to dance ever so delicately in order to make that happen as monetary policy has continually roiled markets when anything changes. Interest rate hikes in the European Union in 2011 plunged the continent into recession, and Ben Bernanke’s every word is tested by the markets for its merit while the same certainly applies to Bank of England head Mark Carney.
By alerting markets to the possible end of quantitative easing, Bernanke witnessed a wild backlash resulting in stock sell offs, bond rate hikes, and a pervasive fear among investors. The Fed has since walked back its comments on easing a bit, reminding markets how amicable the central bank plans to be–that is, as long as Bernanke is around.
With his retirement from the position imminent, speculation swirls around who will take the helm when he steps down. The candidates’ dominating heads represent a dichotomy in policy direction for the bank, with President Obama’s confidant and former Harvard president Lawrence Summers being talked up by the president as a very viable candidate for the job.
Summers has been verbally skeptical of quantitative easing in the past, and has rejected claims by the likes of Warren Buffet that an end to asset purchasing would shock markets. Speaking in 2011, the outspoken Summers questioned whether or not this market shock would actually ensue, saying that, “Some acquaintance with efficient-market-type notions would lead one to be rather skeptical of that idea.”
But the sword appears to be double-edged as markets have reacted with trepidation at the mere mention of ending the program, and yet easing eventually has to end, a phenomenon that Dallas Fed President Richard Fisher has referred to as a ‘Gordian Knot‘ for the nation’s central bank.
England’s Carney faces the same scenario with interest rates in a market that witnessed what European Central Bank president Mario Draghi did to markets in 2011 when he increased them mid-recovery. The British market has been loath to trust Carney so far, despite his guidance, which has tied interest rates to a 7 percent employment threshold. The guarantee to the market has come with a handful of caveats mainly entailing problems with inflation and a ‘financial crisis’. With the ambiguity of exceptions dampening his attempt to give markets reassurance, the reaction has been a bit worse than expected, as speculation on pound futures moved upwards after his explanation to investors and the public.
Then there is Mario Draghi, perhaps the most reserved central banker left on the planet, speaking cryptically and give markets only a taste of what they want to hear as the global adventure towards prosperity continues. Draghi speaks in vague, powerful statements, quelling markets as he tells them he will do “whatever it takes,” and implementing a Outright Monetary Transactions program which has shushed fears of a euro collapse without ever having been used.
While most recently he has only given away to markets that interest rates will remain low for an “extended period of time,” he could get left behind as the his colleagues move towards ever more disclosure to markets. Mark Zandi, chief economist at Moody’s Analytics told Reuters that, “I think it’s difficult for Draghi to go down the path Carney has, but he’ll go down the path — it’ll just take him longer to get there.”
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