Central bankers must make tough choices, and they don’t always get it right.
If Macklem at the Bank of Canada can’t see what’s coming, nobody can.
Do you recall how central bankers assured the public long ago that inflation was temporary?
At the outset of the pandemic, both Tiff Macklem of the Bank of Canada and Jerome Powell of the Federal Reserve used all the authority and confidence at their disposal to assure us that prices, while rising faster than the two had hoped, would soon stop rising and inflation would go away on its own. An increase in interest rates was unnecessary.
It’s hard to believe that central bankers flipped their “transitory” stance just a year ago, as Macklem makes his final rate announcement of the year on Wednesday amidst a warning of $1,000 increases in grocery prices and “trigger rates” for mortgage holders to cover rising interest costs.
Knowing that anything you do could be wrong but having to make a compelling case for your actions anyway in order to reassure everyone that you have things under control is probably one of the most challenging aspects of being a central banker. There is always a lot of room for error, especially when current experts disagree on what the future holds.
Mass societal disintegration?
High interest rates, according to Nouriel Roubini, who predicted the economic downturn of 2008, will bring about a depression on par with those of the 1970s and the 2000s. The Elliot hedge fund claims that hyperinflation brought on by too-low interest rates will cause a “major societal collapse.”
You can count me out of either of those.
While Canadian predictions are more moderate, their authors remain divided over whether rising prices or falling wages will cause more hardship for the working class.
A few short weeks ago, it appeared as though central bankers had finally reached the peak of interest rates and could relax in satisfaction. Some financial experts continue to predict that the Bank of Canada will raise interest rates by another quarter of a percentage point (25 basis points) before pausing for an extended period.
Still, there are skeptics.
Last week, Benjamin Reitzes wrote in BMO’s weekly financial digest, “BMO is calling for a 50 [basis points] hike, with another 25 [basis points] expected in January.” This would mean that the policy rate would be 4.5% by the beginning of 2023, with the likelihood of an even higher end rate.
High interest rates aren’t the only thing that can hurt an economy, as the Conference Board of Canada’s economic modeling of stagflation demonstrated.
The report warns that inflation can have a devastating effect on the real economy because it reduces people’s purchasing power rapidly.
Critics of central bank projections tend to remember them for a long time, unlike the opinions of economic oracles.
For a considerable length of time, it was low
At a news conference in 2020, Macklem announced that rates would remain unchanged at 0.25 percent, saying, “If you’ve got a mortgage or if you’re considering making a major purchase, or if you’re a business and you’re considering making an investment, you can be confident rates will be low for a long time.”
Calls for Canada’s central banker, Macklem, to apologize have arisen in the wake of an apology issued by Australia’s central bank governor, Philip Lowe, last week for telling borrowers, around the same time as Macklem’s announcement, that rates would not rise until 2024.
Comments from central bankers are often taken as a reliable reference point in an otherwise volatile global economy.
But anyone who goes back and re-reads or re-listens to those statements, which have been archived on the Bank of Canada’s website going all the way back to 1995, will realize that the bank doesn’t have some special ability to predict the future.
Instead, as deputy governor Paul Beaudry attempted to do in a recent lecture at the University of Waterloo, central bankers can only look back and consider why they were wrong. Following the financial crisis of 2008, when central banks had raised rates too quickly, the decision was made to not raise rates in 2021.
Beaudry said in September that “with hindsight when people look back at that period, it is generally thought maybe [they] might have pulled things back too quickly,” which influenced some of the team’s approach to the current crisis.
A rule from one crisis cannot be universally applied, he said.
How else could central bankers make predictions for the future if not by benefiting from the wisdom of hindsight?
“People were frightened.”
Repeatedly now, critics have accused governments and central banks of fueling current inflation by pumping money into the economy and lowering borrowing costs in the wake of the COVID-19 economic collapse. While our central bankers kept their cool at the outbreak’s onset, senior deputy governor Carolyn Rogers offered a very different behind-the-scenes view at a meeting with students last month.
Rogers reflected on the time when people lost their jobs, the economy tanked, and the stock market crashed, saying, “I mean, people were scared and there wasn’t, at that time, a vaccine.” Despite having private sector representatives present, “there was no prospect of when the economy would reopen,” as Rogers put it. What we did was necessary at the time, and I think it was the right decision.
Even in hindsight, the decision to assume the post-COVID crash would go away on its own and the promise to keep rates low seem like good ones if you thought we could be headed into the next Great Depression, though we can never know for sure.
Wednesday’s decision, while seemingly less consequential, is also less cut and dried. Future rate decisions can be adjusted easily if they are a quarter point too high or too low.
It’s possible that in six months to a year, we’ll have a much clearer idea of whether or not the Bank of Canada was correct.
