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Today's title is shamelessly stolen from CIBC's week ahead note: The central banker's poker face.
Have a read of this intro 👇
Transparency is a virtue, but not when you’re playing poker, and sometimes that’s how central bankers should see themselves. In the battle against inflation, communicating a tough message about doing whatever it takes to wrestle it down has merit on several fronts.
It can help convince businesses not to plan on ever-rising prices and wages, locking themselves into contracts that will be troublesome if inflation suddenly decelerates. It can prevent consumers from rushing to fill their baskets now to avoid higher prices later, an action that fuels inflation by pumping up demand.
Playing like you have two aces as your hole cards can also get those betting that rates won’t go quite as high, or stay there as long, to fold their hands. By warning that rate cuts aren’t coming anytime soon, Fed Chairman Powell and others on the FOMC have pushed medium and longer term interest rates higher.
For now, that’s where they need to be to tame appetites for yet more 30-year mortgages, car loans, or debt-financed corporate spending. The more the market prices in higher overnight rates down the road, and thereby keeps fixed rate borrowing costs higher today, the less the central bank actually has to do in terms of raising short rates.
It's a brilliant summary of what a central banker's job actually is: Expectation Management.
It's not just about setting the price of money, the pace of QE/QT or whatever you think. Those are the mechanics of the job.
It's sales. If I have something to sell you, we'll talk and agree a deal. We tell each other a story about that deal and why it will work. Everything else is the mechanics of delivering whatever that deal is.
That's how I think of central banking. A confident salesperson is usually going to be most successful. There are plenty of different selling styles, but very few that work if they're not delivered with confidence.
Which is why this needs an upgrade. 👇
Transparency is a virtue, but not when you’re playing poker,
and sometimes that’s how central bankers should see themselves.
Transparency is a virtue, but not when you’re playing poker, and that’s how central bankers should ALWAYS behave.
Especially now. Every time Powell has expressed even the tiniest bit of doubt, markets have taken that dovishness and run with it, reversing the tightening of financial conditions.
Until Jackson Hole.
Whatever your personal opinion of central bankers, the speech was incredibly well-crafted. I wrote about that here 👇
The need to deliver a clear, unwavering, confident message is why even Kashkari has flipped now. If you're a dove, or trying to offer even the slightest bit of nuance, your voice is no longer welcome. Sit in the corner and be quiet. The adults are talking.
There were eight months between these two stories. Just 147 days. That's all it took to complete the transition. 👇
Let's be clear. These people don't have any magic predictive power (just in case you hadn't figured that out yet). It's just another position of authority. Someone who's responsible for stuff. When it goes well, they take the credit. When it goes badly they take the sh*t. Like now.
Somebody has to DO something.
And right now, that's all about getting inflation down, whatever the cost. And they need to convince everyone that they're going to do that.
What they actually do in the end is another matter entirely. Going back to that transparency mentioned at the start, here's my favourite ever central banker quote (Yes, I have a favourite. Don't judge me) 👇
“I’m a shaman. I’m a weatherman, I’m a showman, and I’m an economist.’’
“I’m expected to be, and I am, a storyteller. I tell stories about the future.”
“And if I’m successful in my storytelling,” “people say: ‘Hmm, that’s reasonable.’’
Stefan Ingves, governor of Sweden’s Riksbank.
In this 2009 speech our old mate Stefan talked about the importance of confidence for the GFC recovery 👇
Banks create confidence by telling good and credible stories about the future, stories about why you will get your money back.
Money may make the world go around, but it is good confidence-building storytelling that spins the money around. When these stories fail to create confidence, the markets will dry up.
What's happening now is precisely the opposite.
Gradually withdrawing the safety net of a soft landing (the path towards that soft-landing just keeps getting narrower... Weird) while amping up the rhetoric of "we won't stop, no matter what".
They have no idea what the impact of this rate hiking cycle with a side order of QT will be.
Two quotes from Claudia Sahm (former Fed Economist) offer some insight 👇
The extra layer of problems here is that the Fed is very uncomfortable with the balance sheet. That’s one area where I look at the robust debate among the FOMC and I don’t feel so good. Because they don’t know why it works or how it works. They don’t have enough data points on this working well.
They can’t talk about that much in public because they don’t want to unsettle markets or themselves . . . lift-off [of policy rates] is not the tricky thing here. It’s lift-off in a pandemic, it’s lift-off with a big balance sheet. How do you get out of [the QE] business?
Well, they're about to get a some more data points to study on this. QT is (supposedly) running at full pace.
“The Fed at this point cannot lose control of the narrative,”
“They need to make really clear that they understand what the stakes are [and] what the potential very negative consequences of the path that they have set themselves on are.”
They've got a solid grip on that narrative wheel for now: The Fed's crazy, they say the costs don't matter and they're going to drive the economy off a cliff if they need to.
It's just a story. It might end up being a true story, but a story nonetheless. Once this story ends, a new one takes it's place. Like this 👇
And when that time comes, central bankers will change their tune once again. The narrative cycle resets and the sequel will be written before us, in real-time.
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