Central banks should be heard and not mistaken
PremiumDemand for decryption guides to what central bankers say has been in decline and may even have hit another low this week. This is welcome. But it hasn’t eased their job, unfortunately
There was a time when currency was straightforward and central banks were cryptic. While it is always a challenge to recall stuff that merits no nostalgia, its zenith is hard to forget. A consensus among the bewildered would attribute that high-point to Alan Greenspan, who took over as chief of the US Federal Reserve from inflation-slayer Paul Volcker in 1987, held investors and politicians alike in awe for almost two decades at the helm, and shall stay embedded in memory for what he once told a gathering of business-folk: “If I’ve made myself too clear, you must have misunderstood me." Jaws duly dropped. If few doubted the authenticity of Greenspan’s words, it was not because social media hadn’t yet arrived as much as how distinctly they rang true. As Fed chief, not only was he given to policy utterances that left wide scope for alternate interpretations, an ability to decode them was prized by market players. Strategic inscrutability was seen as an integral part of a central banker’s job back then. Indeed, in a world of trade-offs with no space for ‘one-handed’ economists, it was taken as a good thing.
The tyranny of either-or has not eased in the field of economics. It is still about choices we must make to satisfy limitless needs (and desires) within the limits of our resources. One thing is often at the cost of another. The calls we assign central banks, however, have gained such public salience from one crisis to the next that the few who take them are increasingly expected to explain their actions. This has yielded a new era of clarity—if not contrition—in central bank articulation. Like anything else in an economy, this too is relative, of course. But it matters. At a routine Congressional hearing on Wednesday, the US Fed’s current chief Jerome Powell was asked about the risk of a recession now that it was on a steep incline path with its policy rate of interest. “It’s not our intended outcome at all, but it’s certainly a possibility," he admitted. “We’re not trying to provoke and don’t think that we will need to provoke a recession. But we do think it’s absolutely essential that we restore price stability, really, for the benefit of the labour market as much as anything else." This testimony of the Fed’s priority could hardly have been clearer.
Back home, the Reserve Bank of India (RBI) has been in candour mode as well. At an event last Friday, Governor Shaktikanta Das spoke in unapologetic defence of its easy-money policy in response to the covid crisis. “Tolerance of high inflation was a necessity and we stand by our decision," he said, “…Just imagine if we had started increasing the rates early, what would have happened to growth?" An RBI swerve back towards its legal mandate of inflation control, though, has been explicit since 4 May. And its rate-setting panel’s record of 8 June was revealed a fortnight later with Das’s view captured thus: “The time is appropriate to go for a further increase in the policy rate to effectively deal with inflation and inflation expectations… Accordingly, I vote for a 50 basis points increase in the repo rate, which would be in line with the evolving inflation-growth dynamics and will help in mitigating the second round effects of adverse supply shocks." As in America, this sort of crispness is welcome. Both economies face a crisis of unruly prices. Both are officially sworn to tame them. And neither should let its goal shift. Or let crypto enthusiasts who diss central banks for their follies have the last laugh.