September 17 – Wall Street Journal (Greg Ip): “Can words take the place of actions? The Federal Reserve hopes so. On Wednesday it issued a policy statement promising to get inflation above 2%. In their accompanying projections, officials indicated that would mean keeping interest rates near zero at least until 2024 and until unemployment falls to 4%. ‘This very strong forward guidance, very powerful forward guidance that we have announced today will provide strong support for the economy,’ Chairman Jerome Powell told reporters. To drive the point home, he used the word ‘powerful’ 10 times in the press conference.”
Powell’s hammering home “powerful” had me recalling ECB President Jean-Claude Trichet’s “never precommit.” “The European Central Bank never pre-commits on interest rate moves.” “We are never precommitted as regards the future level or path of policy.” “We are never precommitted and we can increase rates whenever we judge appropriate to do that.”
Powell is struggling to reinforce flagging Federal Reserve credibility. Trichet was focused on establishing credibility for the unproven European Central Bank. The Chairman is directly signaling to the markets the Fed’s resolute commitment to maintain (for years to come) the most extreme monetary stimulus. Trichet was essentially signaling to market participants not to bet on a particular policy course. The FOMC is saying wager freely on an extended period of ultra-loose policies.
With zero rates and $120 billion monthly Treasury and MBS purchases, along with other measures, the Fed has completely succumbed to inflationism. In contrast, pre-Draghi ECB doctrine was founded on well-tested traditional central banking and sound money principles.
It’s as if the CBB has a weekly mandate to remind readers of the abnormality of so much that these days passes for normal. Why was Trichet so adamant against markets betting on the course of monetary policy? Because such activities would add an element of instability and risk compromising ECB credibility. It would increase leveraged speculation, in the process spurring an unstable monetary backdrop. Over time this would bolster asset price inflation and propagate Bubbles. And, importantly, speculative Bubble dynamics would pose increasing risks to system stability and monetary policy flexibility. Maintaining financial stability and central bank credibility were dependent on the central bank’s powerful commitment to sound money. (more…)