David Marsh: Janet Yellen May Be the First of Her Peers to Do This

2015-08-10 IMI

The Official Monetary and Financial Institutions Forum (OMFIF) is a global financial think tank headquartered in London. David Marsh: Managing Director, Official Monetary and Financial Institutions Forum (OMFIF) Raising interest rates has gone out of fashion. With the last concerted rise in world interest rates nearly a decade ago, the doves have been ruling the roost since the financial crisis. None of the central bankers of the world’s seven top leading industrial countries has any experience of tightening credit in their present jobs. The monetary leaders of the Group of Seven advanced countries — Janet Yellen of the Federal Reserve, Haruhiko Kuroda of the Bank of Japan, Mario Draghi of the European Central Bank (accounting for G-7 members Germany, France and Italy), Mark Carney of the Bank of England and Stephen Poloz of the Bank of Canada — have been in their current posts for a collective 12 years. Not one has raised interest rates in this time. All that may be about to change. Yellen looks like being quickest, with the odds narrowing on a September Fed rate hike after Friday’s monthly nonfarm payroll figures showed a July increase of 215,000 jobs, slightly below market expectations but backing an overall picture of the U.S. economy in robust heath. The rate-setting Federal Open Market Committee has one more set of monthly payrolls before its meeting on Sept. 16-17, when many market participants are penciling in the first rate rise for nine years. The rate of monthly job increases has slowed from 260,000 in May and 231,000 in June, but unemployment was unchanged at 5.3% in July, the lowest since 2008, close to the 5.2% that the Fed has signaled is an effective floor. In recent months, representatives not only of industrial nations but also of many emerging market economies — which had previously feared the impact of Fed tightening — have been privately urging Yellen to forge ahead with a move that most judge as a sign of confidence in the world economy. Next in line in the tightening stakes is Carney of the Bank of England — who had his experience of raising interest rates in his previous job as Bank of Canada governor in 2010. Since he arrived from Ottawa in July 2013, Carney has blown hot and cold over an exit from eight years of extraordinary U.K. easing, but he now looks likely to back an increase in interest rates in the first half of 2016. Sluggish wage increases, a further fall in oil prices and the high value of sterling have all damped U.K. inflation concerns. But last week the U.K. central bank depicted the British economy in more optimistic tones than for several months and increased the 2015 growth forecast. In its quarterly inflation report, the BoE noted higher confidence among businesses and consumers. Carney said speculation about a rise was “another welcome sign of an economy returning to normal.” There is little sign of hawkishness among the other G-7 central bank governors. Japan’s Kuroda has vowed to continue full-scale BoJ quantitative easing to achieve the bank’s 2% inflation forecast. Draghi — who acted promptly when he took over in November 2011 to reverse premature interest rate rises by Jean-Claude Trichet, his predecessor — leads an ECB council that continues to favor accommodative policies. Poloz, Carney’s successor, cut Canadian interest rates to a five-year low in July as the effects of lower oil prices reverberated throughout the economy. Among leading emerging-market central bankers, Gov. Zhou Xiaochuan of the People’s Bank of China has been in his job for 12½ years, longer than all his G-7 peers put together, with two experiences of tightening in that time. But the PBoC, which doesn’t act independently but moves in concert with China’s state council, is now back in thoroughly dovish mode, cutting interest rates and reserve requirements on the same day last month as part of an effort to overcome stock market turbulence. With the exception of Zhou, all today’s leading central bank figures have been in their jobs for only relatively short periods. Their initial dovish experiences contrast with the distinctly more hawkish record of some well-known earlier central bankers, above all the Fed’s Paul Volcker and the Bundesbank’s Karl Otto Pöhl and Helmut Schlesinger, whose first months in office, in 1979, 1980 and 1991 respectively, were characterized by controversial bursts of interest-rate increases. Another Bundesbank president otherwise known for monetary orthodoxy — Hans Tietmeyer, who took over from Schlesinger in 1993 — presided over the German central bank for six years without once raising interest rates, reflecting a steady alleviation of monetary pressures in Europe on the path to monetary union. The next few years will show whether any current incumbent can match Tietmeyer’s record.

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David Marsh: Janet Yellen May Be the First of Her Peers to Do This

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