Christine Lagarde Will Keep Buying Assets. Do As You Will, Mortals

I suppose this goes without saying, but the ECB “reconfirmed” its ultra-accommodative policy stance Thursday, after an April meeting which I would describe as something of a placeholder, even as other market participants and analysts seemed keen to overthink it.

In March, the ECB committed to executing purchases under its pandemic QE program (PEPP) at a faster pace, amid what, at the time, was a swift backup in bond yields globally. The April statement said PEPP purchases will continue to be conducted “at a significantly higher pace” during Q2.

The statement, essentially unchanged, emphasized PEPP’s “flexibility” which, as ever, is just a euphemistic way of saying that the central bank is engaged in spread targeting, even if officials won’t call it that.

When you preside over a monetary union comprising disparate economies with widely (and sometimes wildly) divergent views on fiscal policy, it’s difficult to keep the monetary policy transmission channel functioning properly. During crises and mini-crises, the line between ensuring “the smooth transmission of monetary policy” and “accidentally” venturing into government financing becomes hopelessly blurry.

The ECB is perpetually at risk of incurring criticism from both sides. When they attempt to impose fiscal discipline by force, they’re maligned for being a cruel cabal of conspirators hell-bent on impoverishing the periphery at the behest of the Germans. When they’re openly accommodative in a bid to ensure Italy (for example) doesn’t lose market access during a pinch, they’re chastised for killing price discovery and encouraging reckless fiscal policy.

And, of course, everyone’s a critic. Well, everyone except market participants who long ago acquiesced to the situation and exploited it  for profit, as opposed to beating their heads against the wall in a fruitless attempt to outgun an entity armed with a printing press.

In any case, the April statement also reiterated that the bank need not necessarily exhaust the entire PEPP envelope. This is familiar territory. If financing conditions remain loose, purchases under the emergency program could theoretically be dialed back or even stopped, even as principal payments will be reinvested at least through 2023.

That said, the Governing Council reiterated that if things should deteriorate, the ECB can always use the entire authorized dry powder and then add some more. Through the end of March, PEPP purchases totaled just shy of €1 trillion (figure above).

“Naturally,” “regular” QE will continue at the usual pace (€20 billion per month) forever. The GC doesn’t say “forever.” The code phrase for “forever” is: “Monthly net asset purchases under the APP [will] run for as long as necessary to reinforce the accommodative impact of policy rates.”

As Christine Lagarde put it late last month, when asked by Bloomberg Television if it made sense for the market to “test” the ECB, “they can test us as much as they want.”

While I’ll be the first to lament the death of price discovery, there’s something extremely annoying about purported “traders” and “investors” who refuse to acknowledge the reality staring them in the face, and then take to social media (or some doomsday-themed blog masquerading as a newswire) to pretend like they’re engaged in an open rebellion against nefarious central bankers. (Note that these would-be “vigilantes” never mention, or even allude to, any actual positions they’ve taken. That’s almost surely because they don’t have any positions, other than being “long your clicks” — with leverage.)

That kind of rhetoric will cost you money if you buy into it. That’s why, all tearful laments for price discovery notwithstanding, I thoroughly enjoy it when someone like Lagarde just comes right out and tells you the unvarnished truth. Again: “They can test us as much as they want.”

She continued, in the same interview: “We have exceptional circumstances to deal with at the moment and we have exceptional tools to use at the moment, and a battery of those. We will use them as and when needed.”

You can’t trade against that. There’s nothing you can do.

Well, that’s not entirely true. You can pretend to trade against it for your social media followers and also for the hapless souls you’ve trapped in your anti-central bank conspiracy echo chamber.