Having delivered his Monetary Policy Statement, done his press conference, fronted up to the Finance and Expenditure Committee – oh, and roiled the markets – Reserve Bank Governor appears to have jumped on a plane for a quieter couple of days at conference in San Francisco. I don’t begrudge him that – the conference in question is usually pretty good (I got to go once) and this year’s programme looked as interesting as ever. The topic was “Monetary Policy Under Global Uncertainty”.
The Governor was on a “Policymaker’s Panel” – along with a Deputy Governor from Korea and a former Deputy Governor from Brazil. It can’t have been a very in-depth panel (the programme allowed only 50 minutes in total), but we don’t hear much systematic from the Governor on monetary policy and so it was welcome that he chose to release his short (four pages or so of text) remarks. I don’t think I’ve seen them covered in the local media at all. That is perhaps a little surprising as, having greatly surprised commentators and markets in two MPSs in succession, his remarks to this FRBSF panel were under the heading Monetary Policy: A Compass Point in Uncertain Times. Sounds like a worthy aspiration. Shame about the execution.
But what did Orr have to say in his brief remarks?
First, he attempts to suggest that policy (etc) uncertainty isn’t really much of an issue in New Zealand. Yes, he really does claim that, drawing on a measure – of the dispersion of GDP forecasts – which isn’t an indicator of policy uncertainty at all. Now, no one is going to claim that we have anything like the degree of policy uncertainty they face in the UK (or, thus, its major trading partners including Ireland). We don’t even have a “trade war”. Then again, we had months of uncertainty around capital gains taxes, ongoing uncertainty about the future labour market regulatory regime, and now about the future water pollution regime. Oh, and bank capital requirements…..to name just a few.
Then we come to paragraph that I agree with, quite strongly, and yet it seems he no longer does. In the light of the uncertainty (globally) he tells us
it is vital that monetary policy acts as a compass point for decision making
going on to note
For New Zealand, this means setting policy to achieve our price stability target and support maximum sustainable employment. It means acting decisively to prevent an unnecessary worsening in economic conditions and the un-anchoring of long-term inflation expectations. And it means recognising the limits of monetary policy.
I’m not going to disagree, but quite how he justifies his MPC’s decisions, and communications, in and around both the August and November MPSs is less clear. As I noted the other day, in August – when they did act “decisively” there was little attempt to invoke arguments about inflation expectations in support, then we had a couple of months of wheeling out such arguments, only for them largely to be abandoned last week when he chose to err on the side of caution, “unnecessarily” so, at least in my view, against a backdrop of inflation and inflation expectations below targets with (in their own words) downside risks. Not much of guiding light there.
Then we get the sort of paragraph beloved of self-important central bankers
In discussing these topics, I will touch on how, since the Great Financial Crisis, central banks have been tasked with a widened set of objectives. On one hand, we appreciate the constraints faced by other institutes, and the peril that may have resulted from the crisis had central banks not stepped up to the task. On the other hand, central banks are sometimes expected to solve phenomena that are structural in nature, and that do not sit easily within the conventional realm of monetary policy. At the Reserve Bank, we are always exploring new policy options to meet our broadened mandate.
Except that, typically, central banks don’t have a wider mandate how than they did before. That is certainly true of New Zealand – where nothing at all (in legislation) has changed around regulation/supervision, and where the change to the formal goal of monetary policy was, in the Bank’s own telling, more cosmetic than substantive, designed to capture something about the way the Bank had long sought to operate, while altering some rhetoric. The big change in New Zealand has been central bankers looking to extend their own reach, both within and beyond the mandate Parliament has given them – whether LVR limits (arguably within the letter of the law), focus on “culture and conduct” (clearly not), the Maori strategy (not), the green agenda (largely not) and so on. Perhaps in a few corners of the world there has been a belief, by a few people, that central banks can markedly change structural growth outcomes. If so, such a mantra has rarely, if ever, been heard here in the last decade. But it makes central bankers feel important and valued to pretend otherwise.
Keeping on through the speech, we do actually get some recognition that “policy uncertainty” – and “regulatory requirements” – were acting as a barrier to business investment in New Zealand. As he notes, most of this doesn’t have much to do with monetary policy, except that monetary policy needs to take account of whatever is influncing overall demand and supply pressures/balances.
From a central bank perspective, uncertainty has one clear impact: it makes our job harder. Good monetary policy depends on reasonable forecasts. High uncertainty makes forecasting harder. There is more noise in the data and forecasts are more subject to revision. A consequence of this is that the Official Cash Rate (OCR) may be less predictable simply because the world in which we are making our decisions is less predictable.
Except that earlier he showed that chart (mentioned above) in which the dispersion of GDP forecasts has been quite a bit lower than usual in the last couple of years. So it might be a fair point in principle, but in practice – in recent months – the real source of short-term uncertainty about the OCR has been……the Reserve Bank itself. Not a point that Governor chose to address.
He then moves on to a section headed “Monetary policy response to uncertainty”.
First up is a straw man
Firstly, maintaining low and stable inflation enables organisations and individuals to carry out meaningful financial planning, by reducing overall uncertainty. This is something that is nearly impossible when prices are high and volatile or falling uncontrollably.
Neither is a world any advanced country has been dealing with in recent decades (I’m assuming he meant “inflation” was high and volatile), and in the case of “falling uncontrollably” never.
Then we do get to recent New Zealand policy
In particular, it is now more suitable for us to take a risk-management approach. In short, this means we look to minimise our regrets. We would rather act quickly and decisively, with a risk that we are too effective, than do too little, too late, and see conditions worsen. This approach was visible in our August OCR decision when we cut the rate by 50 basis points. It was clear that providing more stimulus sooner held little risk of overshooting our objectives—whereas holding the OCR flat ran the risk of needing to provide significantly more stimulus later.
And yet, wasn’t that title something about a reliable “compasss point”. None of his August approach was flagged in advance, arguments for it unfolded only slowly even after the event, and then – when there was still (on his own numbers) “little risk of overshooting our objectives” they abandoned that particular “least regrets” line, without explanation in advance, in the release, or subsequently. He goes on
We can also address uncertainty through our communication and forward guidance, which are broad-ranging. We reveal our assessment of the economy—good or bad—to the public, so they can make decisions based on the best possible information amid the prevailing uncertainty. We voice the types of policies we believe may be needed to sustain long and prosperous growth—be they monetary, fiscal, or financial policies.
But that is almost exactly the opposite of what the Governor and MPC are doing. We have still not had a single substantive speech from the Governor on monetary policy and the economy. We haven’t at all from three of the statutory members of the MPC. It is harder to make good decisions when central banks spring – quite unnessary – surprises. Oh, and actually it is no part of the Bank’s mandate to be opining on what policies are best for “long and prosperous growth” (although it is remarkable that structural policies appear not to be relevant to the Governor’s view of growth, productivity etc).
There is a final page on “Beyond conventional monetary policy” which I don’t have particular problem with. It is good that the Governor again repeats his intention to publish their analysis. It is only a shame that (a) this process has been so long delayed, including under his predecessor, and (b) that the work done so far has not proceeded in a more open and consultative way, rather than being something akin to the “wisdom” delivered to the masses from the wise experts on the mountain top.
Orr ends in a typically upbeat tone. I just want to highlight the last few sentences in which (as so often) he overreaches, partly in the process of distracting attentions from the failings in areas he is directly responsible for.
Yes, there is uncertainty. Yes, it is affecting us. No, monetary policy cannot directly resolve this issue. But we can offset its effects and empower others to fuel economic activity that will benefit us in both the short and long-term. There has never been a greater time to make use of accommodative monetary policy for investing in productive assets.
Yes, monetary policy has a (vitally) important stabilisation role. It was why countries set up discretionary monetary policy many decades ago. But it can do nothing to offset the blow to potential output created by policy uncertainty and other regulatory burdens. It does nothing to boost our longer-term prosperity. And as for the final sentence…….he falls into the trap again of trying to convince us that low interest rates are some exogenous gift, empowering whole new opportunities, when in fact interest rates – long-term market-set ones and official OCRs – are low for reasons that seem to have to do with diminished opportunities, diminished prospects for profitable investments. Don’t get me wrong – given all that, the OCR should be lower (mimicking what real market forces would be doing if short-term interest rates were a market phenomenon), but when interest rates are falling in response to deteriorating fundamentals it is a stretch – at very least – to expect the sort of pick-up in business investment the Bank often forecasts but rarely gets to see.
It wasn’t a persuasive or particularly insightful set of comments. Perhaps his San Francisco audience – knowing little of New Zealand – weren’t bothered, but we should be. We should expect a lot more from such a powerful, not very accountable, public figure.
(And if you want a speech from a much more serious figure, try this one – given at the same conference – by Stephen Poloz, Governor of the Bank of Canada. There is a depth and seriousness to it that is simply now not seen from senior figures in our own economic policy agencies.)