Central Banks - Market Manipulators?
One idea generation exercise is to consider how a period of economic history might be remembered and recently we debated today’s environment. Whilst many remembered the low interest rates, the enduring memory was the active and persistent involvement of central banks in financial ‘free’ markets. This involvement has reached unprecedented levels and the interference and manipulation has ranged from negative interest policy, managing both short and long-term interest rates and even buying equities via ETF’s. The scale of these activities and their consequences have put a greater focus and pressure on all central banks.
In her book, former US Federal Reserve (the Fed) policymaker Danielle Dimartino Booth shares her insight on the lack of knowledge that investors have about the inner workings of the Fed and their decision-making processes. Whilst there have been numerous books written about the Fed, she asks every American to “understand this extraordinarily powerful institution and how it affects his or her everyday life and fight back.’ What her book does not do is pay homage to the Fed.
One of the problems for central banks is understanding the criteria on which they are judged because they have been designed to be ‘independent’ from politicians. This makes it complicated for those same politicians to then scrutinize and hold their central bank to account. One of the reasons for this independence is to prevent to monetary policy being used by governments to remain in power by for example, printing money to facilitate high levels of public spending.
Some performance indicators have been assigned to central banks, such as an inflation target in the UK and the Fed’s dual mandate of inflation and employment. These targets feel simplistic and it’s hard to hold anyone accountable for their achievement or the wider impact on society. We believe that there is no way of knowing to what extent the Fed has helped, or hindered, the journey towards the economic outcomes for which it is held responsible and it is difficult for institutions to be effective if they are not accountable via an effective feedback system.
The Fed’s word is generally considered gospel within the investment community and their statements viewed as scripture - to be dissected to a degree which seems excessive. In our appraisal of US interest rates, we acknowledge that current policy has been positive for debtors and the owners of assets, whose prices have risen considerably in an environment of ‘free money’. We also note the less welcome outcomes for savers and the populism that has been fueled by the rising inequality between those with inflating assets and those without. Regardless of your view, we should all consider the actions of central banks more broadly and hold them accountable on behalf of ourselves and our clients as the range, scope and impact of their activity has now spread well beyond what was envisaged when they were created.
Senior Portfolio Specialist
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