ECB President Jean-Claude Trichet has called on central bankers and policymakers worldwide to face the current financial crisis with composure, to facilitate a return to confidence.
In the final words of a closely watched post-meeting press conference Thursday, European Central Bank President Jean-Claude Trichet made a comment that summed up the attitude of policymakers during the current financial crisis. Asked what it would take to see financial market turbulence subside, Trichet called for the French equivalent of a stiff upper lip. "Keeping one's composure (is) the rule of the game in periods that are difficult obviously. It is certainly the rule for public authorities, for central banks," Trichet said. "I think that if we can all be up to this necessity of keeping composure, of sang-froid in the circumstances, we will facilitate the return to confidence which is of the essence." That sang-froid has not won many friends in financial markets which have spent the last few weeks screaming for a bigger policy response from central banks. In the U.S., that's translated into large-scale bets on Federal Reserve interest rate cuts during the months ahead. But policymakers' cool, step-by-step approach is winning plaudits in some places, with analysts saying that by maximizing their options and not contributing to the panic, monetary authorities may be making the best of some difficult choices. Trichet's words were echoed a few hours later by a host of Fed speakers. Speaking in London, St. Louis Fed President William Poole acknowledged that market expectations are important but "we cannot be a slave to the market expectations...I don't think the Fed is going to be pushed into any decision, I really don't." Atlanta Fed President Dennis Lockhart, in his first local address since taking office in March, also underlined that the "Fed's longer-term objectives are well served by a deliberate and measured response to financial market turbulence." The reactions of major central banks have varied case by case, but there have been similar patterns globally. When the crisis intensified a month ago, most central banks responded with liquidity injections aimed at easing the strain in key short-term money markets and aimed at bringing down short-term borrowing rates. Some banks have gone further. The Fed has unveiled a host of side measures over the past three weeks, including lowering the discount rate, extending the length of time it can lend for and reducing the fee it charges as part of lending securities from its holdings. The Australian central bank significantly broadened the range of securities it can accept as collateral. | |
| Limited Objectives | |
| Yet, in their efforts to unclog markets that seized up as banks became cautious about lending to their counterparts and to other market participants, central banks have placed tight limits on what they aimed to achieve. From the beginning, policy makers have stressed that the recent market turbulence was, at least in part, an overdue repricing of risk that they had long predicted. They also made it clear they were not interested in bailing out investors who've made bad bets. But in recent days, banks have further honed in on what they can and can't do. While liquidity injections were aimed at keeping markets liquid and lowering overnight borrowing rates, European policymakers have made it clear they will not take actions aimed at forcing down so-called term rates, short-term rates on longer than overnight loans. In a statement Wednesday that broke a long spell of silence from the Bank of England, its Monetary Policy Committee said it could make an injection of liquidity next week but such "measures are not intended, nor can be expected, to narrow the spreads between anticipated policy rates and the rates at which commercial banks can borrow from each other at longer maturities." ECB's Trichet repeated that sentiment Thursday. For Howard Archer, chief European and U.K. economist at Global Insight in London, this cool response which keeps all options open is the right one. "They have taken fairly calm, measured steps and I think they will probably continue to so. There's always going to be some quibbles here and there but I think so far they've generally managed it fairly well," he said. Jack Malvey, global head of fixed income at Lehman Brothers in New York, also thinks central banks "are doing an admirable job," taking their cue from the "standard crisis play book." "We cannot truly...disagree with the timeline (of actions) taken here. They are taking a very balanced approach." | |
| Hikes Delayed, Fed Cut Seen | |
So far, the main interest rate action by central banks has been to draw back from rate hikes. On Thursday, both the ECB and the BOE kept rates steady at meetings when just a few weeks ago, a rate hike was widely expected. The Bank of Japan also held back from tightening policy late August seeking more time to see how the current conditions play out, while the Bank of Canada axed hawkish language from its statement and stood pat at 4.50% when it met Wednesday. Trichet explained the basis for the ECB's decision Thursday, saying that while upside risks on inflation still exist, there's just too much uncertainty right now about how long the financial turbulence will last and what its effect will be on the real economy. "We have to gather additional information, to examine new data before being able to" decide the appropriate monetary policy, he said. Of course, there is one major central bank that is expected to move its benchmark interest rate - and that's the Fed. In a speech last week, Bernanke made it clear the Fed is willing to cut rates to 5.0% when it meets on Sept. 18, saying the Fed must take the recent financial turbulence into account when deciding policy and vowing it stands ready to "act as needed to limit the adverse effects on the broader economy." Yet even while Fed speakers acknowledged Thursday that the risk of recession is now stronger in the U.S. because of the market fallout, they made it clear they still have enough sang-froid in supply to keep focusing on the economic fundamentals and not be pushed into any hasty action. "The picture isn't conclusive that financial market troubles have translated into serious difficulties in the broad economy," Lockhart told reporters. "We will continue to monitor all of those indicators... and take the necessary action as things change." | |
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