The monetary policy procyclicality: a new source of concern

Central bankers are progressively adopting a pro-cyclical behavior. The global growth momentum is now lower and central banks’ strategy now have a restrictive bias. In the US, Canada, UK and in many emerging markets, central banks’ rates are higher than at the beginning of the year. This has already changed expectations and it will continue with a downside risk on the economic activity.
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Wages and the ECB monetary policy

Discussions on wage dynamics in the Euro Area. The momentum is now higher (2%) but not sufficient to push core inflation on the upside. The enigma is not solved yet. That’s the analysis of this NY Times article.

Nevertheless, the example comparing France and Germany in the article is not totally convincing. There is still a lot to understand on the labor market.

Workers may finally be getting a bigger piece of the economic pie — at least in Europe. Just don’t ask why, or whether it will last.

In the decade since the financial crisis, much of the global economy has recovered and is back on stable footing. Companies are reporting record profits, unemployment levels are plummeting and overall global growth is back on track.

Wages in most developed countries, however, have barely budged.

Read the article here. nyti.ms/2mI1Hnv

A Lower World Trade Momentum

These two graphs this morning in the “Daily Shot” of the Wall Street Journal show the lower world trade momentum. All the indicators converge to a lower dynamics. With US tariffs and retaliation the risk is an extended downward trend.

The virtuous loop seen in 2017 between trade and activity had an impulse coming from very accommodative monetary policies all around the world. There is no new central bankers’ impulse. It is even the contrary. Investors now expect that the next trend will be on the tighter side after the Fed.
Moreover the uncertainty associated with the lower global economic mood (from non cooperative strategies from the US, UK, Italy and retaliation measures) reduces the economic horizon and therefore the will to invest from corporate companies.

In other words, after a surge in 2017 coming from central banks’ impulse, there is a downside adjustment which is amplified by non cooperative behavior from many governments.
The main risk at the global level is a rapid growth slowdown. It could be sooner than later.

A Former Central Banker Tells Other Central Bankers: “Stay Away From Davos” –

An interesting point of view on the role and the place of central bankers in the political spectrum.

In an interview with ProMarket, former Bank of England deputy governor Sir Paul Tucker explains why the “unelected power” of central bankers threatens our system of government.

Sir Paul Tucker
The European Central Bank found itself under renewed scrutiny this month, after Italy accused it of buying too few Italian sovereign bonds, allegedly in an effort to pressure the country’s new populist government to adopt more conventional economic policies.

The accusation was yet another example of the curious position the ECB has repeatedly found itself in ever since the central bank’s president Mario Draghi promised to “do whatever it takes” to preserve the euro in 2012. But it was also part of a larger, global wave of populist attacks against central banks. In Turkey, President Erdogan has repeatedly attacked the country’s central bank for raising interest rates, even going so far as to threaten the bank’s independence. In Britain, Environment Secretary Michael Gove has assailed the Bank of England and other central banks for their loose monetary policies, arguing that these policies benefited a small minority of “crony capitalists” who had “rigged the system” in their favor.

This political backlash came as no surprise to Sir Paul Tucker, the former deputy governor at the Bank of England and a research fellow at the Harvard Kennedy School of Government. Central bankers, Tucker writes in his timely new book Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State, have emerged from the financial crisis with enormous new powers, entrusted by governments with the ultimate responsibility of making the economic recovery work. This change, he writes, relied on the “false hope” that central banks can create long-term prosperity. It is also fundamentally different than the response to the Great Depression, which was led by elected officials, not central bankers. Their expanded responsibilities, argues Tucker, have also turned central bankers into the “poster boys and girls” of unelected power, a process which ultimately erodes the legitimacy not only of central banks, but also our system of government as a whole.

Tucker, the chair of the Systemic Risk Council, a non-partisan think tank composed of former government officials and financial and legal experts, is a lifelong central banker. His book, an ambitious tome that stretches over 656 dense pages, is both a philosophical treatise on the limits of the administrative state and a passionate call for fellow technocrats to heed the lessons of recent political upheavals, pull back their power, and engage the public in a wider debate.

We recently sat with Tucker, who visited the Stigler Center in May for a series of interrelated lunch seminars, for an interview on politics, regulatory capture, and central banking’s crisis of legitimacy.

Read the interview promarket.org/former-central-banker-tells-central-bankers-stay-away-davos/

Wishful thinking at the Bank of England

The BoE comment on its monetary policy suggests that a rate hike is a possibility at the August meeting as activity is expected to rise. BUT, the momentum is low and even if there is an improvement it will not catch up what has been lost in 2017.
The graph shows the GDP deviation from trend in the UK, EA, France and Germany. The UK was not able to catch the strong EA momentum in 2017 and its internal dynamics was not enough to support growth. Therefore what’s happening at Threadneedle Street? Wishful thinking?
UKez-fr-ge-GDPdeviation.png