The last week in financial markets has been about central banks. In the U.S., Fed Chair Janet Yellen held her second post-FOMC press conference after the committee dutifully kept rates steady and cut asset purchases by the expected $10 billion per month. The story that did get some press though is how the Fed seems unconcerned about the growing rate of inflation.
This is in contrast to the U.K., where Bank of England (BoE) Governor Mark Carney surprised markets with a rather ground-shaking speech late last week in which he said rate rises “could happen sooner than markets currently expect.” This from a man who took the helm of the BoE just last year and, on balance, had assured markets that rates would stay low for a long time. Markets sat up and took notice, with the British pound sterling rising to its highest level since 2009. Most analysts and markets had expected the first rate rise from the BoE to happen in early 2015. Now the door is open for a rate rise as early as this year.
It would be easy to fall into a trap and become an economic policy wonk here, focusing on the data and trying to derive monetary policy from a set of rules. And granted, there are significant differences – the BoE is facing a frothy real estate market while the Fed views inflation data as noise. But at their core, the two central banks represent a very different philosophy on policy.
The Fed remains nearly paralyzed at the prospect of policy rate normalization. They do have good reason; U.S. markets have been so displaced from any sort of equilibrium for so long that any hint of a return to a less-active Fed sends shocks into the system.
By contrast, the BoE seems to be reintroducing two-way price action in markets and taking away an automatic presumption that U.K. policy rates are anchored to the current 0.5%. While that has led to some volatility, it has also put some life and confidence back into the U.K. economy.
My View: Mr. Carney has it right this time. While in the U.S. we remain addicted to cheap money, the Bank of England seems ready to take the global stage and lead by allowing expectations of rate hikes to seep into the financial system – showing the world how to lead your economy back to health.
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