Thursday, 17 November 2016
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The Truth About Central Banks

It amazes me that we pore over every utterance of the RBA and the FOMC, earnestly trying to distill what the Central Banks are going to do with interest rates next. Why do we still benchmark ourselves to these enfeebled and often ignored committees, committees that are clinging to relevance, committees whose interest rate declarations are fast becoming expressions of hope rather than reality.

Because the reality is that market interest rates, the rates that matter, have been going up since July and whilst Trump's election may have accelerated the move, the penny is dropping that interest rates have now bottomed and are trending higher, possibly in the long-term.

US market interest rates, as measured by the 10 year bond yield, are now up 0.9% since July and at the same time the Australian 10 year bond yield is up 0.85% since August. Do we really think the RBA will be cutting rates again? Do we really think the FOMC should be fluffing around and hedging their bets before raising rates? With US bond yields at 2.2136% the FOMC are now 1.7136% behind the curve. With 10 year bond yields at 2.626% the RBA is 1.126% behind the curve, which is inequitable, because what investors are paid is benchmarked to the Central Banks and what they paying is dictated by the market.

Central bank commentary is highly overrated. The markets seem to believe that the Fed, Janet Yellen, the RBA, the ECB, Mario Draghi and all the other central bank members across the world have some hidden but highly important economic information or agenda that we don’t know, and in the quest to know the unknown, the market falls to dissecting every syllable of every word of every central bank comment in its search for the true meaning behind every utterance, something that will reveal their hidden knowledge and agenda.

But truth be known, and on the back of a conversation with one of my lecturers who used to develop economic models for the RBA, models that were flawed by his own admission, I don’t really think there is anything to know beyond the crude interpretation. We are crediting central bankers with some higher level of intent that I’m not sure the central banks or their members actually have. I'm not sure they actually possess the vision and intuition we credit them with beyond what they are saying publicly and we already know. I have certainly had that feedback from my ex RBA employee lecturer, an academic who described the RBA process as Central 'Wank'.

In which case this endless reinterpretation is all just a ridiculous game. We are second-guessing people who don’t have anything to be guessed. It keeps us all in a job but the truth be known, perhaps we should just take central banks and their central bankers at their word.

In which case, when the Fed members say they remain data dependent, maybe we should believe them because that’s exactly what they are, waiting for the next month’s data which will be used at next month’s meeting, at which they’ll decide, as they always do, what to do and what to say. It's not a plot, it is what it looks like it is. 

In between those meetings I'm sure they are fishing, cycling, golfing, sailing (all the divorce sports) as well as gardening and spending time with the family like everyone else. Or do you think they're actually out there crafting some Machiavellian agenda that they're going to keep secret from us? 

The Central Bank debate will never end, is hugely over analysed and a lot simpler than we make it out to be. We should take it on face value but instead we credit our central bankers with some miraculous power to tell the future. They do not know and the truth is that most of the time they don’t know any more than we do, and in the case of some central bankers probably a lot less.

Central bankers have to be intelligent or they surely wouldn't end up advising a central bank. So I ask, do they find it surprising to be so unintelligently credited with powers they don't possess? One day one of them will surely break ranks and admit that they don't know. But on that day I am entirely sure that we will once again dissect their sentences, reinterpret their syllables and locate the Machiavellian purpose behind their obvious deception without considering for a moment that they might, actually, just, be telling the truth!

"It is always important in matters of high politics to know what you do not know. Those who think they know, but are mistaken, and act upon their mistakes, are the most dangerous people to have in charge."

~ Margaret Thatcher: Statecraft (2002)

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