Graffiti outside the ECB's future headquarters. (Getty)
Could the European Central Bank be learning a thing or two about managing the message? Ahead of Thursday’s interest rate-setting meeting, when policymakers will want to do nothing more than say “we’re holding steady”, it looks like the bank may come up with an eye-catching announcement to give everyone something to write about.
That something is the long-running and vexed question of why the bank that loves to tell you how transparent it is (well, at certain times, once you’ve cleared security and as long as you understand no quotes should be used from this conversation) keeps the minutes of its governing council meetings secret for 30 years. The practice makes it an outlier – the Federal Reserve, Bank of England and Bank of Japan all publish minutes of their monetary policy meetings within a month of the meeting that they cover.
The minutes of the Fed’s January meeting do not suggest that QE3 is about to stop – indeed they reaffirm ongoing asset purchases – but they do make it hard to believe that buying at a pace of $85bn a month really is open-ended.
Compared with the December minutes, which had people wanting to continue QE3 until the end of 2013 or stop well before then, January reads like a deliberate attempt to be less clear about when asset purchases will end. The December discussion came from voting members, January is just participants; December referred to dates, January does not.
For me, the most interesting passage in the November Fed minutes was:
“The Chairman asked the subcommittee on communications to give consideration to a possible statement of the Committee’s longer-run goals and policy strategy, and he also encouraged the subcommittee to explore potential approaches for incorporating information about participants’ assessments of appropriate monetary policy into the Summary of Economic Projections.”
A host of communication options were discussed in the minutes but these are the only two that the Chairman referred back to the subcommittee on communications (vice chair Janet Yellen, governor Sarah Bloom Raskin, Charles Evans of Chicago and Charles Plosser of Philadelphia). That’s a strong signal of the direction that debate is going.
I wrote one of the more aggressive reports on Ben Bernanke’s speech in Jackson Hole, saying he “hinted” that the Fed will do more to support the US economy, but qualifying that by noting that he avoided the emphatic language of his 2010 speech and offered no discussion of the Fed’s easing options.
Quite a number of analysts found no such hint in the text and it would have been better – although not very practical for a Saturday newspaper – to say that he showed an easing bias.
What is interesting now is to go back and read the speech in light of subsequent FOMC-speak and the minutes of the August meeting.
There are some extremely interesting points in today’s FOMC minutes which provide more forward-looking policy signals than any others I can remember recently.
No taper of QE2
The signal here could not be more clear. The New York Fed “indicated that the greater depth and liquidity of the Treasury securities market suggested that it would not be necessary to taper purchases in this market”.
Fed officials are not persuaded that there is any monetary policy value in sending a signal through a taper so a request from the markets desk was the only remaining uncertainty on this point.
“In light of the Manager’s report, almost all meeting participants indicated that they saw no need to taper the pace of the Committee’s purchases of Treasury securities when its current program of asset purchases approaches its end.” In other words, it’s not going to happen.
Minutes just released show that all members of the monetary policy committee maintained their vote from the previous month. Andrew Sentance voted against the motion to hold rates, preferring a half point rise; Martin Weale and Spencer Dale preferred a quarter point rise; and the remaining six members voted in favour of holding rates. Adam Posen, as before, voted against maintaining the Bank’s asset purchase programme at £200bn, preferring a £50bn increase.
Some of those voting to hold rates acknowledged that “the case for an increase in the base rate had strengthened in recent months,” but preferred to wait for clarity on several uncertainties. Many think MPC opinions will be greatly influenced by the second quarter growth estimate, due out before the May meeting. On the “key question” of growth, the Bank seemed optimistic. “The most recent indicators of output had tended to support the view that growth had resumed in the first quarter,” read the minutes, citing surveys and indices of business output and sentiment.
Indicators of consumer spending were “much weaker”, however.
The headlines from the Fed minutes are thoroughly covered on ft.com so a few more subtle points here.
What was day one of the two day meeting about?
Structural unemployment. It’s not a surprise that the FOMC wanted to discuss this given how important the degree of slack in the economy is for future policy. The summary in the minutes is feeble and gives no real sense of the committee’s conclusion – although maybe they didn’t reach one. The closest it comes is this:
Most of the research reviewed suggested that structural unemployment had likely risen in recent years, but by less than actual unemployment had increased.
Which is a statement of the blindingly obvious. It is a bit of a missed opportunity to put this issue to bed since I think there are few people in the Fed system who believe that structural unemployment will become a binding constraint any time soon.
Brazil’s central bank surprised many economists by raising interest rates by less than expected last week. Today, it published the minutes (in Portuguese only) of the monetary policy committee meeting at which the decision was taken. Anyone hoping they would make matters clearer may be disappointed.
As expected, the committee said weaker global and domestic demand had contributed to its decision. Less predictably, it suggested it would be happy to bring consumer price inflation in line with the government’s 4.5 per cent target only in early 2012, rather than during next year.
The minutes are clearly open to interpretation. In a note to clients, Itaú Unibanco said they confirmed its view that the committee, known as the Copom, would leave rates unchanged at its next meeting on August 31 and September 1. Barclays Capital, on the other hand, said they supported its call for a 50 basis point increase at the next meeting and a 25bp increase in October.
Inflation data, due out next week, will steer the next interest rate decision from the Reserve Bank of Australia, minutes show. “The important question for the Board at its next meeting would be whether the new [price] information materially changed the medium-term outlook for inflation,” reads the statement. “Pending this information, the Board judged it appropriate to hold the cash rate unchanged.”
International concerns continue to offset a pretty healthy domestic picture, the minutes show. Policymakers welcomed a moderation in the Asian recovery, but were watching closely to see the scale and speed of the slowdown. And the board discussed at length the issues in Europe, noting that “the coming month would see important announcements about the health of the European banking sector, which had the potential to have a significant impact on financial markets and global confidence.”
Yesterday, the Office for Budget Responsibility made it clear that it did not think fiscal tightening would tip the British economy over the edge, partly because “it would be normal to expect some monetary policy response to additional fiscal tightenin.” Some on the MPC think otherwise. Andrew Sentance, an external MPC member, voted to raise interest rates by a quarter of a percentage point. His reason, published in the minutes this morning was as follows:
“For one member, developments over the past month were consistent with a pattern which had been developing over the past year. Inflation had proved resilient in the aftermath of the recession, casting doubt on the future dampening impact of spare capacity on inflation. Demand had recovered at home and abroad, and the average growth of the main measures of UK nominal demand in recent quarters had been above typical pre-recession rates. Despite current uncertainties, for this member, it was appropriate to begin to withdraw gradually some of the exceptional monetary stimulus provided by the easing in policy in late 2008 and 2009.”
If this view gains ground on the Committee, the idea that monetary policy will offset fiscal tightening – if it can – disappears. So far, it seems Mr Sentance does not have much support for his views.