More Unknowns Leave Central Banks Facing Greater Internal Strife

By Simon Kennedy

Photographer: Andrew Harrer/Bloomberg

European Central Bank President Mario Draghi added new stimulus last month even before... Read More

About an hour after cutting interest rates in June, European Central Bank President Mario Draghi realized the assembled reporters had failed to ask one of their favored questions.
“Now let me say something I haven’t said,” Draghi interjected after answering four rounds of other queries. “The first question you ask in these press conferences: ‘Was it unanimous?’ Now this time it was unanimous.”
After Governing Council pushback on previous non-standard measures, Draghi clearly felt the need to declare agreement on introducing a negative deposit rate from the rooftops even without being asked. Of the major central banks, his council of 23 voters is
likely the most unwieldy and politically-charged with frequent discord.
Its ranks are nevertheless no longer alone in splitting. During the past few weeks, officials at the Bank of Japan, Federal Reserve and Bank of England all fractured over just what they should be doing when managing their economies.
That suggests the emerging divergence between international central banks that has been a theme for investors this year can also be seen inside the institutions. It marks a change from the largely all-in unanimity that marked the fight against the financial crisis and the recession in 2008.

Quantitative Easing

By October, normal service had resumed at the ECB, with Bank of France Governor Christian Noyer and Bundesbank President Jens Weidmann among those opposing a program to buy asset-backed securities, albeit for different reasons.
Bank of Japan policy makers last week voted 5-4 to boost their quantitative-easing program, with Governor Haruhiko Kuroda siding with the majority.
Two days earlier, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota objected to the Fed’s decision to stop buying assets. Since August 2011, the Fed’s Open Market Committee has only been unanimous three times, most recently in June, with Philadelphia Fed President Charles Plosser and Dallas Fed President Richard Fisher also taking contrary stances at times.
At the Bank of England, policy makers Martin Weale and Ian McCafferty are already seeking higher interest rates for the U.K.
To be sure, differences aren’t new and are often healthy. A study released in September by the St. Louis Fed found that dissents on the Open Market Committee averaged one per meeting between 2008 and 2013 and that regional presidents were always those in the minority.

Policy Shifts

The early 1960s and late 1970s were the periods of most argument, according to the report, while the complete agreement of the pre-crisis years of 2000 to 2004 shows perhaps that’s no virtue either.
The current trend toward internal division still suggests any future policy shifts will be harder-won, that investors need to listen to a broader range of officials for insight and that there is a greater risk of surprise as with last week’s decision by the Bank of Japan.
Perhaps at the center of it are increasingly clashing views of how economies will react to the continuous pulling of monetary levers and whether central banks should still have such easy policies five years after the worldwide recession ended.
“You are seeing a genuine debate about preferred policy outcomes and how to achieve them,” said Drew Matus, deputy U.S. chief economist at UBS Securities LLC in New York. “Simply put, central bankers are uncertain about the efficacy of the tools they are using and are operating in an environment with more unknowns than knowns.”