Listen: you are going to have to pry former trader Richard Breslow’s contention that everyone is too complacent about hawkish central banks from his cold, dead hands, ok?
For what seems like years (although that’s logically impossible because central banks have only been leaning hawkish since Sintra), Breslow has been keen on suggesting that DM policymakers actually mean it this time. Sure, there’s still some bluffing going on and the real test would come if someone made a “mistake” and triggered a sharp decline in risk assets, but the overarching point is that with the exception of Kuroda, everyone is going to kick the tires on normalization – if only to free up some countercyclical breathing room to combat the next crisis.
In his Tuesday missive, Breslow revisits this point ahead of four key meeting this week, all of which, he reminds you, will be characterized by hawkishness in one form or another. Sure, that de jure hawkishness (hold/taper/hike) will be packaged in conciliatory wrapping paper and delivered with a dovish bow on top, but that doesn’t change the fact that a hold is not a cut, and a taper is not an increase in asset purchases.
Oh, and do note this bit:
Unless of course, transitory is more convenient. Every time you hear the word transitory, think tightening bias.
Now remember what we’ve said time and again about the “transitory” meme: they’re using it to mask a tightening bias that likely emanates from fears that keeping accommodation in place for too long risks blowing ever bigger bubbles.
Read below as Richard regales you with his latest thoughts which, while less entertaining than yesterday’s installment, are worth a skim….
We do so love to tie ourselves into knots. The four central bank meetings coming later this week all have a “but what if” paragraph in their previews. If the analysts’ forecast is for something hawkish, we point out the key risk is they are more dovish. And of course vice-a-versa. Their not being prudent or cautious, they just don’t know. We are in a state of flux. On top of that, after a week of careful presentation of exactly how markets will react to the selection of each Fed Chair candidate, we are spending this week reassessing the whole thing. Think they’ll be hawkish? Add a “but what if” and hope you can get back some of the option premium you spent when the topic first came up.
- But it’s not all bad. This isn’t simply more of the same. For years, central bankers liked to periodically go through a talking-tough stage with everyone confident that they were either bluffing, fooling themselves or would blink at the first sign of trouble. We can now, however, reasonably believe that while they remain in utter thrall to financial condition indexes, they’re no longer talking potential rate changes merely for the sake of trying it on for size
- It’s time to pick up the pace and it’s probably not the smartest idea to leave it up to their successors. Although it seems that we’re now reconsidering what it means to be the continuity choice versus a change agent. In Sweden, Riksbank is meeting Thursday and no changes are expected but with a new Monetary Policy Report, the recently reappointed “dove” Governor Ingves is now seen as being potentially freed up to be more hawkish. Are we so traumatized by events that everyone must be portrayed as an “unreliable boyfriend?” Instead of preview we should call these things central bank caveats
- Having posited that there may indeed be greater risk of falling behind than being unnecessarily pre- emptive, it’s still worth reminding ourselves that they are only lecturing about over-exuberant and confident traders because, like many market participants, they are prone to endless extrapolation. Unless of course, transitory is more convenient. Every time you hear the word transitory, think tightening bias. It will be fascinating to see what happens the first time we get that “healthy” correction
- It’s also interesting that in a last gasp attempt to belay the hawkish global tilt we are revisiting the income inequality issue. It’s true this is tearing societies apart. It’s also true that monetary policy has nothing to offer on this tragedy. By definition, central bankers are statisticians as much as economists. It’s someone else’s responsibility (heaven help us) to work on the head in the oven, feet in the freezer problem. The fact that the debate is being waged on this point proves that the economic arguments against hikes are on slippier ground
- Wherever you come out on what will happen later this week, the shift is that all four banks will be on hold or hawkish. No one is talking about cuts. And that’s an appropriate change. Dovish now means less hawkish than expected