What central banks may have the world over is a failure to communicate.
Not Tightening
Bernanke will “want to emphasize that a tapering of asset purchases is not a tightening of policy and isn’t necessarily irreversible,” said Feroli, a former researcher with the Fed board in Washington.
Bond Vigilante
The dumping of credit is reminiscent of the waves of selling that happened in the 1980s, only back then investors were worried about fiscal, not financial, policy. Yardeni coined the phrase “bond vigilante” to characterize the monetary institutions involved.
‘Very Worried’
Alan Blinder, Fed vice chairman from 1994 to 1996, said he’s “very worried” monetary markets will overreact to steps by the Fed to cut and eventually exit from its efforts to support the economy.
Reverse Move
Treasury yields will “probably even reverse some of the recent upward move” if Bernanke succeeds in getting investors to buy into the Fed’s complicated message, said Roberto Perli, a partner at Cornerstone Macro LP in Washington and a former researcher at the central bank’s Division of Monetary Affairs. The Fed has a history of making markets understand its intentions, reducing fears of a sharp policy tightening in 2004 and introducing a time frame for a rate increase in August 2011, he said.
Near Zero
Policy makers have held the target for their benchmark rate near zero since December 2008. They’ve promised to keep it around there as long as unemployment remains above 6.5 percent and the outlook for inflation doesn’t exceed 2.5 percent. Joblessness was 7.6 percent in May, while inflation, as measured by the personal-consumption-expenditure price index, was 0.7 percent in April.
Surging Yields
In Japan, Kuroda also has faced a surge in 10-year government-bond yields to 0.815 percent on June 14, even as the Bank of Japan boosted its bond-buying to defeat 15 years of deflation. The yen also has climbed to the highest against the dollar in two months, having touched its weakest level since 2008 in May after Kuroda began easing.
Bond-Market Volatility
The central bank last week refrained from discussing bond-market volatility, and Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute in Tokyo, says investors may have looked for too much from the BOJ.
‘Some Self-Correction’
At the ECB, Draghi is undertaking what Deutsche Bank AG economist Gilles Moec calls “some self-correction” in its perceived stance after remarks Draghi made on May 2 triggered an increase in stimulus bets. The central bank cut its benchmark rate to a record low of 0.5 percent, and Draghi said officials had an “open mind” about reducing the so-called deposit rate below zero.
Not Realistic
Hours after Draghi said in May the ECB was technically prepared for a negative deposit rate, Governing Council member Ewald Nowotny told CNBC that such a move “shouldn’t be seen as something that’s realistic in the foreseeable future.” Colleague Christian Noyer said in a May 28 interview he also doubts the merits of such a policy.
Investor Insight
The communications challenges act as a speed bump after a period in which transparency has been hailed as key for policy. The more insight investors are given into the minds of officials, the theory goes, the more they’ll be able to define correctly a central bank’s plans and reinforce them in the market.
At the Fed, for example, Bernanke has begun regular press briefings, adopted an inflation goal and released the expectations of officials for the appropriate path of policy rates.
The crisis now is that officials are in what Sylvester Eijffinger, a professor of financial economics at Tilburg University in the Netherlands, likens to what old maps would call “terra incognita” -- the Latin for “unknown land.”
In the case of the Fed, while good communications are vital for controlling markets, they’re complicated by the officials themselves not knowing when to exit, disagreeing over the right timing to do so and political pressure to hold back.
“Those factors make it very hard for the central bank to communicate,” said Eijffinger, who advises the European Parliament on monetary policy. If the Fed isn’t able to “control the process” to recovery and manage inflation and interest-rate expectations, then the U.S. could “be confronted with a kind of abrupt slowdown of growth” two or three years from now.
