When I started this particular post, I was going to address the Governor’s latest speech that described the three things that keep him up at night. But then along came today’s year-end interview with the Governor in the Globe.
As per his speech on being sleepless in Ottawa, it struck me that this poor sap is never going to get a full night of REM while he is acting as chief money creator. For those of you with a life, meaning you missed what he said, the three main concerns he has are cyber threats, high house prices with the associated household debt, and the tough job market for young adults. His problem beyond apnea is that he will never be able to change the situation. Casting cyber threats aside, keeping rates at ridiculously low levels to encourage young Karim to tear himself away from a parent’s cooking and laundry service and enter into the workforce will only exacerbate his nightmares about house prices and debt. Obviously, raising rates to help on the financial stability side will ruin the rest of Karim’s career life.
The only proper response is a Cpap machine, more Ny-quil and for him to listen to his own advice. As the Governor himself said in this week’s Globe article, “We said it all along: we have one instrument - interest rates, and one target - inflation. All other stuff people would like us to control is not actually our job. It is a side effect.” He could have skipped the speech.
But as I said above, the Globe article stopped me in my tracks. The piece makes it clear that the he and the market are not seeing eye to eye these days. He is just as frustrated about communication with the street as the street is with him. Apparently his shift from forward guidance, where the central bank lays out its intensions over the near term to his “risk management” framework (whatever the hell that is) has not gone as smoothly as he would like. It has been difficult to shake the market of their habit of expecting him to tell them what to think, while at the same time providing the market the information they need to think for themselves.
This touched a nerve. For a long time, this central bank has told the market the framework they use to make policy decisions. Recently the Senior DG laid out in a speech in New York the sausage-making process that relies heavily on their many models and then adds a few dashes of judgement to address any uncertainties. The market has access to the same prime ingredients, the incoming data which describes aggregate demand, the Bank’s latest opinion of the economy’s potential and the objective of the Bank, which is to achieve the 2% inflation target over the medium term. With all of that, sans forward guidance, the market can make a reasonable forecast of what the Bank will do next, if the Bank itself adheres to the same framework based on quantitative observations.
What the market cannot do is read minds and guess what spices the Colonel is putting into the bucket for this picnic. According to the article, every decision is now tableau rasa, where they build each statement from the ground up and address areas of uncertainty with their judgement. Because of the high number of risks and uncertainties in the current environment, there is an inordinate amount of judgement being applied, too much for the market to have a fair chance at guessing what is next.
The quote above says that the Bank should only be concerned about the inflation target and all the other stuff is not their worry. So why the long face at Governing Council meetings about Karim, our basement-trapped young adult? How was the market, from the framework taught to it, to know that GC would suddenly think it is the Bank’s responsibility to keep policy extremely accommodative to give this one select group a little more time to move on up. It’s not lack of forward guidance or adjusting to a “risk management” approach (whatever the hell that is) that is causing the problem, it is lack of discipline on the part of the Bank as to their own policy framework.
But wait, there’s more. In the article, the Governor seems to bristle over the fact that the market “over-read” the word “cautiously” in their statement, appearing to think this was a code word for no move. These market people are such simpletons as “it’s only language” after all. But how are the simpletons suppose to put that word in context when it is followed up by statements, included in this article, that say the “potential to slip into a deflationary scenario is much more preoccupying. We need to get ourselves up there for real, and to the 2% zone, so we have room to manoeuvre for the next shock that comes along.” I admit my simpleton status, but that would suggest to me as long as the Governor doesn’t think 1.6% core inflation is “up there” near 2%, then the hurdle is extremely high to start moving on rates. Just sayin’.
All is not lost. Apparently the Governor believes that the market is finally coming around to better understanding his risk management approach. He cites the September rate hike when, according to Bloomberg, the bond market had priced in a 50:50 chance of a hike following the release of extremely strong economic numbers just several days ahead of the decision. He asks out loud how on earth the market could have got it right if the Bank had not been communicating clearly. I don’t even know where to start with his conclusion. I would suggest that the market did get it right despite their communication. The 50:50 odds tell me the market figured out that in this new “risk management” approach (whatever the hell that is), the economic numbers don’t really matter and it’s a toss up as to what this guy will do next. Should make for an interesting New Year.
I will admit that after reading this article, I have added one more thing that keeps me up at night.
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