A timely caution on uneasy uncertainties
A timely caution on uneasy uncertainties
Published: June 14 2006 03:00 | Last updated: June 14 2006 03:00. Copyright by The Financial Times
When central bankers start talking about uncertainties, the rest of the world sits up and listens. Financial markets, especially, pay attention, hoping to find clues about the future. Mervyn King, governor of the Bank of England, is the latest luminary to warn about increased risks in the economic outlook. His cautions, though immediately unsettling, are however a sensible response to markets characterised by a greater degree of uncertainty than for some time.
Mr King highlighted new uncertainties such as whether, given the threat of imported inflation, businesses would still be able to recruit as easily as when the low costs of imported goods and services increased the spending power of take-home pay without high wage settlements.
His remarks follow last week's comments by Ben Bernanke, chairman of the US Federal Reserve, that the US economy was "in transition". A few days ago, the European Central Bank raised interest rates just a quarter of a percentage point to 2.75 per cent, to give itself flexibility in the face of either a faltering eurozone recovery or increased fears about inflation.
For any central banker, there are some abiding unknowns in setting monetary policy even in more stable times. Tom Geithner, president of the New York Fed, recently identified imprecise knowledge about howand when policy actions affect the economy; and the limitations of the data on which judgments are based.
Central bankers now face a further range of uncertainties. One of the most important, and a significant factor in market turbulence, is how far asset prices will correct in response to the tightening of monetary policy. Repricing is itself desirable, but getting there is likely to be a bumpy process.
Today's lack of clarity about thetiming and even direction of future interest rate moves follows a period of relative certainty. From June 2004 when the Federal Open Markets Committee began to raise the federal funds rate from the historic low of 1 per cent, it was evident what path subsequent rate decisions were likely to follow. But this degree of knowledge of the future course of policy is the exception, rather than the unpredictability of present conditions. It indicates that something had gone badly wrong.
When policy is back to normal and the world itself is uncertain, central bankers must adapt their policies in the light of events and new information. They should analyse a range of possibilities, including the implausible but disastrous. They should also be as transparent as possible about how they make decisions, even if they cannot predict those decisions themselves.
As for financial markets, they should recognise that brilliant as central bankers are, they are not clairvoyant. Nor should they be seen as Cassandras. Their job is to steer economies through inevitable uncertainty.
Published: June 14 2006 03:00 | Last updated: June 14 2006 03:00. Copyright by The Financial Times
When central bankers start talking about uncertainties, the rest of the world sits up and listens. Financial markets, especially, pay attention, hoping to find clues about the future. Mervyn King, governor of the Bank of England, is the latest luminary to warn about increased risks in the economic outlook. His cautions, though immediately unsettling, are however a sensible response to markets characterised by a greater degree of uncertainty than for some time.
Mr King highlighted new uncertainties such as whether, given the threat of imported inflation, businesses would still be able to recruit as easily as when the low costs of imported goods and services increased the spending power of take-home pay without high wage settlements.
His remarks follow last week's comments by Ben Bernanke, chairman of the US Federal Reserve, that the US economy was "in transition". A few days ago, the European Central Bank raised interest rates just a quarter of a percentage point to 2.75 per cent, to give itself flexibility in the face of either a faltering eurozone recovery or increased fears about inflation.
For any central banker, there are some abiding unknowns in setting monetary policy even in more stable times. Tom Geithner, president of the New York Fed, recently identified imprecise knowledge about howand when policy actions affect the economy; and the limitations of the data on which judgments are based.
Central bankers now face a further range of uncertainties. One of the most important, and a significant factor in market turbulence, is how far asset prices will correct in response to the tightening of monetary policy. Repricing is itself desirable, but getting there is likely to be a bumpy process.
Today's lack of clarity about thetiming and even direction of future interest rate moves follows a period of relative certainty. From June 2004 when the Federal Open Markets Committee began to raise the federal funds rate from the historic low of 1 per cent, it was evident what path subsequent rate decisions were likely to follow. But this degree of knowledge of the future course of policy is the exception, rather than the unpredictability of present conditions. It indicates that something had gone badly wrong.
When policy is back to normal and the world itself is uncertain, central bankers must adapt their policies in the light of events and new information. They should analyse a range of possibilities, including the implausible but disastrous. They should also be as transparent as possible about how they make decisions, even if they cannot predict those decisions themselves.
As for financial markets, they should recognise that brilliant as central bankers are, they are not clairvoyant. Nor should they be seen as Cassandras. Their job is to steer economies through inevitable uncertainty.
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