Want A Strong Currency? Stop Printing It
Today the pound surged by more than 2% against the euro, its biggest jump since January, after an interview in the FT with BOE executive director for markets Paul Fisher hinted that the UK may be coming to an end on the UK's version of quantitative easing. While the entire interview is a must read for the latest in Central Bank thoughts on numerous issues such as the Input gap, deflation and fiscal policy, it is the topic of QE that sparked the move in the GBP. Curiously, even CBs are unable to disentangle the vicious loop of a "higher market - presumably improving economy" driven exclusively from a declining national currency, which in turn lifts equities as the underlying debt deflates or inflates with every tick of whatever the respective currency seems to do: just look at the S&P - it trades not with any fundamentals (the euphoria in AA and INTC stocks is well over with the gaps on their "stellar" earnings about to be filled) but merely with what the perceived value of debt is as represented by currency fluctuations. And of course, and decline in the currency is seen as an equity positive. Yet even countries such as Britain, which have benefited immensely from doing just what the Fed has proven to be an expert in (printing, printing, printing), are realizing the time to pull the plus is near. The question: when, if ever, will Bernanke finally follow suit as well?
Relevant sections from the FT interview excerpted below. Full interview can be found here.
FT: If we move on a little bit to QE itself and
the asset purchase scheme. As Mr QE in the bank, there seems to be
coming out of the bank a sort of line which you see in David Miles’
speech, Spencer Dale’s speech, Charlie’s speech yesterday, which seems
slightly contradictory. It says that on the one hand QE is absolutely
working, everyone is very sure about that; but then no one is sure how
well it is working, and the calibration would take PhD students in x
number of years and we would still not know how it has worked. It is a
contradiction; you can’t on the one hand say it is working but we don’t
PF: I think it’s not
really any different from when we made big changes in interest rates.
You never know what the counterfactual would have been. You never know
what would have happened without the policy change. And so, on a
scientific basis you can never precisely calibrate what the impact of
any policy change is; and that is certainly true here. What we can
judge is whether or not the speed and scale of the effects are what we
would have wanted, given the rise in asset prices, given what is
happening to business expectations and confidence, it clearly certainly
seems to be on track. And people get hung up on particular indicators
or particular numbers for success. And QE is quite complicated, it
works through a number of different channels, and those channels can
combine in different ways to give you different combinations of
effects. So, getting hooked on one dimension or one channel isn’t a
particularly sensible place to be. Just to give you an example, one of
the ways that QE is working is in stimulating demand for corporate
bonds, so large corporates have been borrowing more in the capital
markets and using it to repay bank debt; so the outcome from that is
that bank lending would be lower than otherwise. Now, that is helpful
because it’s helping both the banks and the corporates to repair their
balance sheets. But there may have been some expectation on the part of
commentators that bank lending would rise as a result of QE. And
eventually it would because you are putting the banks in a better
position and the corporates in a better position for future lending,
but the short-term impact goes the other way.
Do you think, looking at things like M4 lending or M4, there has been
far too much emphasis on that? We could quite happily have a creditless
PF: The broad
money channel has been one of the main channels through which we expect
QE to work, so you do need to spend time going through the money
numbers in detail. But the money numbers are never something you can
just take at face value; you always have to spend a long time digging
into the entrails to see what is going on. It is also a particularly
good case of what is the counterfactual. Given the fall in nominal
output levels, you would have expected money growth perhaps to have
gone negative. And so the fact that it has remained as a small positive
number, and the underlying measures that we look at, is actually quite
strong relative to the counter factual; even though it looks weak
FT: What evidence would you
point to as the strongest evidence so far that QE is having an effect
on what you say is the ultimate policy objective, which is nominal
PF: Well, the
real economy effects will take a bit longer to come through. At the
moment what we see, the more immediate impact is more likely to come
through financial asset prices and through expectations and confidence.
I think those two channels in particular have both come through quite
strongly. Business surveys, financial market surveys are actually
showing quite a strong rebound in confidence. And obviously we’ve seen
quite a rebound in selected asset prices over a period of six months or
FT: How has your view on the calibration of QE, the amount, changed since the policy started in March?
don’t think we have changed much our assessment of the impact of one
pound of QE on the economy. What really changed, particularly early on,
was our understanding of where the economy was. When we started in
March, end of February, we would only have had data about the first
month or so of Q1, which was the really bad quarter for GDP growth. So,
by the time you took a bad Q1 set of numbers, and a set of Q2 numbers
which weren’t great, given what has happened in Q1, the economy was in
a worse place than we would have wished at that stage. So, the main
news for us was just how deep the recession was going to take us, and
therefore a need to do more on asset purchases than we had originally
But it was always the case that we were going to start
off in asset purchases and then decide how big the programme was going
to be as we went on. So it wasn’t as if the initial 75 was ever going
to be an indication of a final resting place; it was always going to be
changed as we judged things as we went along.
Now we’re sort of coming close to the 175 limit which was decided in
the August meeting. Using the knowledge you now have about how you
think QE is working, both on asset prices and in confidence, if you
stick at 175, what would you predict to be the effect on government
bond yields and confidence?
first of all, let me say I think it’s unlikely we would ever say we had
stopped, and that we were going to stick at a particular number. It’s
much more likely, say, that we would pause. I think that’s important
that we want to keep open the option of doing more later, even if we
had formally stopped. And that may give people some pause for thought
in terms of the market reaction. I think some of the expectations out
there are a bit too black and white about the exact date on which we
stop, and then after that, the next thing we’ll be selling. So I think
we want to keep open our options at that stage.
And we don’t
know. Everybody is telling us and expecting that there will be a
reaction in gilt prices at that point, but we’ll have to wait and see.
Certainly, the market remains with elevated volatility relative to
But actually, I think the remarkable thing is how well
the gilt market has functioned given that we now hold 165 billion of a
market which in total is only 700 billion, including index linked and
FT: So you must have some...
before you can take a decision to pause, you must have a sense of how
you think the market is going to react.
think what we have to decide always is what’s the important policy
decision in terms of the medium run in the UK economy. That’s got to be
our focus. Then you might want to try and mitigate any extreme market
reactions to that. But you can’t let the short run market reaction
dictate and stop you from pursuing the best monetary policy that’s in
the best interests of the economy.
You must have a sense of whether, if you paused, whether that would
send gilt yields higher, because that’s one of the operations... the
way that you have the effect on the economy as a whole. So you must
have a sense of whether a pause would... you say people in the market
tell you the gilt would rise, and that’s certainly what they tell us.
Do you think that’s right or wrong? Because you’re going to have to
have that sense before you take a decision.
no. If we think we’ve done... what we’ll be looking at is the medium
run inflation outlook, and the short run fluctuations in gilt yields
won’t necessarily impact too much on that. But yeah, you wouldn’t
expect gilt yields to go down on the board’s announcement, so it’s a
sort of one-sided bet in that sense.
But you don’t know. People
obviously are expecting us to stop at some stage, and so to a degree it
will be priced into the market. Whether we’ll do it in November or at
some later date may be uncertain. But the fact of us reaching a
stopping point shouldn’t be a surprise to anybody, and we’ll probably
learn something when we get to that stage, and we’ll learn something
which will help us then to set policy when it comes to selling in the
future, or recommencing purchases.
FT: When David Cameron last Thursday said this printing money has to stop soon, was that a helpful thing to say?
you’ll forgive me if I don’t want to get too involved in commenting on
speeches by politicians. I think the important thing for us is that
both parties have consistently expressed support for the framework
we’re operating under in terms of the inflation target, the Monetary
Policy Committee and its independent policy on setting interest rates
or asset purchases. And there was nothing in Cameron’s speech which
detracted from that commitment.
FT: You didn’t see a wild cheering when he shouted, this printing money has to stop soon, as not an indication of where…?
PF: No, I’m not going to read too much into that speech.