I flew out to Jackson Hole last week for a lengthy interview with Bank of Canada Governor Stephen Poloz. Bottom line: He's in no rush to raise interest rates. Timing the move will be difficult. "It will be a very judgmental thing," he said. But that judgement won't be Mr. Poloz's alone. He will consider input from his colleagues on the Governing Council, to be sure. He also will be counting on financial markets to help him make sense of economic indicators that lately are sending plenty of mixed signals.
"You can't be out there, i think, being totally categorical about" where the economy is headed, Mr. Poloz said. "Rather, you develop that uncertainty around what you are trying to do and that leaves open a role for markets to play as you work your way through it. The law of large numbers can help you out in a way. The market has a role to play in sorting out the various possible hypotheses."
The idea of relying on markets to inform policy came up again in a discussion about whether the Bank of Canada must reflexively follow a change in policy at the U.S. Federal Reserve. (Short answer: no.) "In the last several months we've gone to some lengths to pull ourselves out of a forward-guidance setting," Mr. Poloz said. "It's been beneficial because our markets have been two-way markets. Our inflation number comes out and the markets wrestle over it and things react and it can go either way depending on which analyst was advising you and which side you think it will be. I think that's a healthy way for the market to be."
We've come a long way since wags attempted to guess Fed policy by eyeing the bulk of then-chairman Alan Greenspan's briefcase ahead of meetings of the U.S. central bank's policy committee. Former Bank of Canada governor Mark Carney and others made the point after the crisis that too many investors had recklessly abandoned their own research in favour of trying to interpret the signals sent by central banks.
Mr. Carney argued for less spoon feeding in the belief that less certainty about monetary policy would reduce the risk of massive one-way bets going wrong. The adoption of explicit forward guidance by many central banks – including Mr. Carney's Bank of England – delayed a broad move to less-explicit communication. But it has arrived in Canada and investors expecting Mr. Poloz to lead them by the hands will be disappointed. He has no qualms in admitting that he as uncertain about the future as anyone. The Bank of Canada and the markets are in this together.
"There's going to be a process of normalization at some point when our confidence is there and we'll be watching for all those symptoms to be tilting toward inflationary risks as opposed to what we've got now," he said. "It's very premature. It's way too early to start timing. Models will give you answers, but models will give you whatever answer you want. I'm not going to give you an answer to that. Markets have an expectation built in. I believe in markets. They play a very important role. Manipulating or trying to guide them is just not in our game plan."