Central bank policy remains the predominant theme in financial markets, hence when the leaders of these institutions speak everyone listens. Last week, ECB President Mario Draghi gave a speech entitled “The International Dimension of Monetary Policy”, in which he subtly warned of the risk of “destabilising spillovers” from monetary policy, and the need for other areas of policy – e.g. fiscal policy – to share the burden of boosting economic growth and inflation. In essence, monetary policy is not the silver bullet that can alone solve the world’s economic problems.
While Draghi’s speech is not the easiest read, I would recommend you take the time to read Mark Carney’s speech, entitled “Uncertainty, the economy and policy”. He gives a straightforward breakdown of the main sources of uncertainty and an honest insight into how the Bank of England deal with uncertainty. While stressing the importance of a plan, Carney also reminded his audience of the limits of his powers. “Part of that plan is ruthless truth telling. And one uncomfortable truth is that there are limits to what the Bank of England can do.”
While central bankers have warned about the uncertainty around their own forecasting and policies, and the limits to what they can do, financial market participants have largely those warnings, preferring to operate in a stimulus induced market environment. As a result, every wobble in financial markets has prompted calls for more stimulus measures from central banks – in the form of lower interest rates and asset purchases – and these institutions continue to oblige.
A dangerous interdependence has been created which has the potential to end badly. When that time of reckoning will come is the biggest uncertainty of all!