lunes, mayo 22, 2006

Stephen Roach on Today's Central Bankers

I worry increasingly that history will not treat the recent record of central banking kindly. Inflation may well have been conquered — a conclusion financial markets are actively debating again — but that was yesterday’s battle.

What happened along the way? For starters, circumstances changed — in particular, circumstances that a one-dimensional monetary policy framework was ill-equipped to handle. Two developments are key in this regard — IT-enabled productivity growth and globalization. Both of these structural developments had — and continue to have — powerful disinflationary consequences. Fixated on CPI-based targeting — or some variant thereof — central banks missed the trees for the forest. Focused on formulistic linkages between policy instruments and inflation, they failed to allow for the structural pressures that reinforced an increasingly powerful disinflation.

What can be done? In technical terms, the problem boils down to one of coping with asymmetrical risks at low nominal interest rates. The inference here is that the policy rule of the inflation targeter may need to become increasingly flexible as an economy approaches price stability. When inflation is low and a price-targeting central bank pushes nominal interest rates down to unusually low levels, there are new risks to confront — namely, asset bubbles. Central banks that let economies “rip” because inflation risks are minimal, are asking for trouble. That doesn’t mean monetary authorities should target asset prices. It does mean, however, that there are times when asset markets need to be taken into consideration in the setting of monetary policy. A low nominal interest rate regime is precisely one of those times.

In the end, there must be more to monetary policy than a single-mined preoccupation with price stability. Once “zero inflation” is close at hand, the monetary authority needs to become more nimble and broaden out its goals. In a low-inflation climate, monetary authorities should be especially wary of fostering excess liquidity that plays to the asymmetrical risks of asset bubbles; instead, policy should become predisposed more toward tightening than accommodation.

Además, en Prudent Bear:

will suggest this evening that acute dollar vulnerability is poised to significantly curtail the Bernanke Fed’s flexibility. The ramifications for a policy approach that pushes the Credit system into overdrive to counter financial disruption are different going forward - perhaps much different. The greatest problem for the global financial system currently is enormous and relentless dollar liquidity excess. Inciting Credit growth and risk-taking may very well prove counter-productive, and it is likely that aggressive (1998-style) Fed actions would exacerbate a flight out of dollar securities. A flight from the dollar would only then worsen the deteriorating inflation backdrop. Not only is it possible that the Fed loses the luxury of lowering rates during the next crisis, it may very well be forced at some point to do what other countries are forced to do - raise rates to mitigate a run on its currency.

Perhaps we’ve already been somewhat privy to the backdrop for the next crisis: a sinking dollar, spiking metals prices, surging crude, and rising global bond yields. A scenario where marketplace dislocation manifests first in the currency markets (with a faltering dollar) is as reasonable as it would be problematic. Here, one would assume that the Fed’s proven modus operandi of adding liquidity, cutting rates, and inciting more Credit and liquidity would be only counter-productive. And, as we have witnessed, the nature and consequence of current leveraged speculation are more unsettling than those preceding 1998. Today’s inflationary backdrop nurtures destabilizing speculative leveraging in all the “un-dollar” markets – certainly including the emerging markets and commodities. This creates a highly unstable situation prone to myriad and recurring Bubbles, volatility and busts. Accordingly, the characteristics of the underlying debt instruments are problematic and increasingly susceptible to wild price gyrations.