Central bank “speak” could take a leap forward this week.
Bank of Canada Governor Mark Carney is scheduled to give a speech on communications in Toronto on Tuesday, and the U.S. Federal Reserve will debate making its policy guidance even more explicit at a two-day meeting that ends Wednesday.
Policy makers can affect behaviour by adjusting the level of interest rates; they also can influence the economy by telegraphing the likely course of borrowing costs. Communications is also crucial in maintaining confidence in the central bank’s competency to control inflation – it was no coincidence the Fed introduced quarterly press conferences last year at the same time its policies became especially novel and complex.
Mr. Carney was widely praised for his communications skills in the testimonials that followed the announcement that the Bank of Canada Governor would ascend to the same position with the Bank of England in July. But these descriptions tended to have more to do with Mr. Carney’s charisma – the reassuring smile, the carefully assembled suits – than his approach to enunciating policy.
There’s more to it than that. Mr. Carney’s tenure at the Bank of Canada has included something of a re-education campaign for investors who had come to expect central bankers to take them by the hand.
Since 2009, Mr. Carney has tried to condition financial markets against expecting such explicit guidance. He embraced the academic argument that a little uncertainty could be good for financial stability: a healthy debate about the likely path of interest rates eliminates the risk of a one-way bet, which essentially was the case in the U.S. ahead of the financial crisis.
Mr. Carney’s method has been to be transparent about how the Bank of Canada approaches its mandate. For example, he said publicly that there is a limit to how far Canadian policy makers can allow their benchmark interest rate diverge from that of the Fed, a notable concession from the leader of an institution that otherwise bristles at the suggestion that Canadian interest rates ultimately are determined in Washington.
But Mr. Carney stops short of signalling a path for interest rates, shunning the code words favoured by former Fed chairman Alan Greenspan and former European Central Bank president Jean-Claude Trichet.
Andrew Spence, a managing director at the Ontario Municipal Employees Retirement System, said in an interview that he was impressed by Mr. Carney’s refusal to “spoon feed” the market. “He doesn’t want to give people an edge to make money,” Mr. Spence said.
Fed policy, on the other hand, has become extraordinarily transparent. The U.S. central bank says it will keep borrowing costs near zero well into 2015, contingent on inflation. Some officials want to make that guidance even clearer by linking policy to numeric targets rather than calendar dates.
Charles Evans, the president of the Chicago Fed, advocates leaving current policy in place until the unemployment rate falls to 6.5 per cent, provided inflation stays below 2.5 per cent. The Fed has been debating Mr. Evans’s proposal and others like it for months. A decision to proceed with the experiment could be made this week, although that probably would require moving against the wishes of a minority of vocal dissenters.
There is an important distinction to be made between Mr. Carney’s approach to communications and that of the Fed. The Fed’s full embrace of transparency isn’t permanent; rather, it’s an exceptional policy necessitated by the fact that the U.S. economy still is in a recovery phase even though the benchmark rate has been set at zero for four years.
Mr. Evans told The Globe and Mail’s editorial board last month that his numeric targeting idea would be ill-suited to normal times. Expect Mr. Carney to amplify that point this week. Canada’s economy is sluggish, but the recovery is over. So is the need for hand-holding.