Coming out of the Great Financial Crisis, and on the back of a massive increase in their intervention in capital markets (a.k.a. Quantitative Easing), central bank heads such as Mario Draghi, Mark Carney and Janet Yellen have been accorded rock star status in the business press. So, it is not surprising that interpreting the oral and written messages of the heads of global central banks occupies a lot of our efforts – especially with respect to their direct influence on bond and currency markets.
As compared to twenty years ago, when central banks seemed to love the mysterious power of surprise, the central banks of the world now bend over backwards to be more transparent and to avoid surprising capital markets. Fed Chair Janet Yellen and Bank of Canada Governor Stephen Poloz are both clear communicators who make great efforts to share the conclusions of their respective policy-making committees in as clear a manner as possible. Yet despite the best of intentions, more than a few experts on Bay Street purported to be astonished that the Bank of Canada chose to raise the Bank Rate in September rather than in October. (Clearly, there’s not a lot of long-term thinking on Bay Street if a difference of one month sends a PhD in economics into emotional orbit!).
Of late, both the Fed and the Bank of Canada are deemed to be “data dependent”. This means that future decisions on monetary policy will depend on the statistical reporting of future economic activity and how it varies from what has been expected by the central bankers’ econometric models, field surveys and other sources of economic intelligence. Now, most of us would have expected that this was always the case. I certainly have spent an entire career thinking that objective evidence of economic activity mattered a great deal to our policy makers at the Bank of Canada. However, the nuance (and all central bankers love nuance) is that this time, more than ever, the bankers are even more dependent than they have been in the past!
The Secret Revealed
It may not be much, but it is a little nugget of insight. As the guy inside Nexus with primary responsibility for watching the central bankers, I know I need to follow the data. And by following the data, I’ll anticipate what the rock stars of the central banking world are thinking. Without wanting to be over-confident, I’ve got this covered. If Yellen, Poloz and their ilk are data dependent, so is Nexus.
Alas, just when I thought it was going to be easy, I happened to flip through an old edition of Grant’s Interest Rate Observer (April 22, 2016). In it, I came upon the following quote concerning the subject of data dependence from a former governor of the Federal Reserve.
“None of you are making decisions in your businesses based on three-month-old data that is backward looking and subject to a ton of revision. I’m not saying this data comes to the Fed with biases. I’m just saying it is by definition wrong, old and subject to massive revision.”
What former governor would speak such heresy? Why none other than Kevin Warsh, President Trump’s mooted replacement for Janet Yellen! Maybe interpreting the next moves of the central bankers isn’t going to be so easy after all. GJG