The global Central Banks are relying increasing on verbal intervention.
The reasoning here is very simple: actual monetary policy is proving to have marginal effects. In the US, every new wave of QE has had less and less impact on the stocks.
I mention stocks specifically because it is now obvious even to the most ignorant commentator that QE was designed to aid Wall Street and few others (see recent admissions by both former and current Fed officials that QE was a “backdoor Wall Street bailout” and “gift intended to boost wealth.”
These admissions are creating a secondary issue, namely that QE is proving to become increasingly toxic from a political perspective. Indeed, even the mainstream media has picked up this theme.
This is not to say that QE will suddenly be dropped entirely (note that the Fed is tapering its programs gradually, the act of tapering simply reducing the pace of asset purchases rather than ceasing them altogether).
However, the point remains, that if promises of QE can produce the desired effects (higher asset prices) without eliciting the same level of political consequences, why bother even launching it?
The EU seems to have learned this lesson better than the US. European Central Bank (ECB) President Mario Draghi managed to pull its entire financial system from the brink of collapse in 2012 simply by promising to do “whatever it takes.”
The European markets erupted higher and haven’t looked back. The fact that the ECB would face a tangled web of politics and legal issues to actually back this claim up was irrelevant, investors knew the ECB wanted to act and so poured into the markets.
Two years later, Europe’s economy remains excruciatingly weak. Bank lending is virtually non-existent and the human cost is becoming outright horrific (over 25% of Europeans are now living in poverty).
What does the ECB do? It cannot force EU banks to lend. And it cannot force EU consumers to take out loans (or trust bankers for that matter). So the ECB leaks that it has “modeled” a €1 trillion QE campaign.
After all, verbal intervention worked well before. Why wouldn’t it now? If the goal is to lower yields further and boost asset prices, it’s a lot easier (and less legally problematic) to simply hint at something than to actually do it.
You can see the Yellen Fed playing off of this as well. Yellen’s first FOMC meeting saw her not only proving more hawkish than Wall Street expected… she actually went so far as to even hint at raising interest rates in the future.
The markets balked and Yellen did an about face, stating within a few weeks that the economy would need “extraordinary commitment… for some time” and that she believes that “view is widely shared” by her fellow policy makers.
Again, if the promise of help and liquidity can have the intended impact, why bother even announcing a new program?
Look for this theme to increase going forward both in Europe and elsewhere. Central Bankers are aware that their monetary efforts are failing to produce the allegedly intended results. Moreover, they know that these efforts are becoming increasingly unpopular with citizens.
So Central Bankers will be increasingly relying on verbal intervention. At least until the next asset price collapse occurs.
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