Has Ben Bernanke made Stephen Poloz’s job more difficult?

The Federal Reserve chairman and the Canadian dollar

by Stephen Gordon

In normal times, conducting monetary policy is a combination of setting short-term interest rates and managing expectations about the future. But when interest rates are so low that the zero lower bound becomes a binding constraint, monetary policy becomes less a matter of what the central bank is doing now and more a matter of communicating what the central bank is planning to do over the next few years.

The yield curve is a good way of illustrating the role of expectations. According to the pure expectations hypothesis, long-term interest rates are set equal to the average of the short-term rates: for example, the six-month rate would be set equal to the average of the next six expected monthly interest rates. This is almost never the case; other factors such as risk and liquidity will generate deviations from what the simple model predicts. But it’s still the case that changes in longer-term interest rates are largely driven by changes in expectations. So short-term changes in the yield curve — that is, the relationship between interest rates and the duration for which they apply — are typically driven by short-term changes in expectations about the future.

If a central bank wants lower long-term interest rates, it’s not enough to simply promise to keep future short-term interest rates low: talk is cheap. Promises have to be credible, and one of the more effective ways to make believable promises is to establish a history of making good on your promises. So it was a good thing for the Bank of Canada that it had accumulated some 15 years of credibility in carrying out its inflation-targeting mandate when the crisis hit.

On April 21, 2009, the Bank of Canada lowered its policy rate to its lower bound, and it accompanied this measure with a ‘conditional commitment‘ to keep the policy rate at its lower bound until at least the end of the second quarter of 2010. The Bank’s goal was to generate a downward revision of future expected short-term interest rates, and it was largely successful:

The Bank of Canada’s  ’conditional commitment’ announcement is a good example of a successful exercise in central bank communication. Which brings us to the remarks made by Ben Bernanke on June 19. It’s reasonably clear from the text of his remarks that Bernanke was not trying to bring about an upwards shift in the U.S. yield curve, and Fed officials have since confirmed that this was not what the Fed wanted. But the simple fact of mentioning what might seem to be obvious — at some point, the Federal Reserve would eventually wind up its asset purchases — appears to have been interpreted as an announcement that the Fed would stop buying assets soon:

 

But look what happened in Canada:

There are two plausible reasons why Canada’s yield curve shifted up:

  1. Investors are idiots. This wouldn’t be the first time that markets seemed to be unaware of the fact that Canada has its own currency and that Ben Bernanake is not in charge of Canadian monetary policy.
  2. Developments elsewhere — particularly in China — are shifting yield curves up everywhere.

These explanations are not mutually exclusive. Either way, this is not a development that the Bank of Canada is likely to welcome. The associated decline in the value of the Canadian dollar — the CAD is down about 0.03 USD since June 19 — may or may not be enough to offset the increase in long-term rates.

There’s a French expression: manquer une occasion de se taire: “to miss an opportunity to keep quiet.” Stephen Poloz is unlikely to actually suggest that Bernanke missed a chance to shut up, but he might be forgiven for thinking it.




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Has Ben Bernanke made Stephen Poloz’s job more difficult?

  1. “Investors are idiots. This wouldn’t be the first time that markets seemed to be unaware of the fact that Canada has its own currency and that Ben Bernanake is not in charge of Canadian monetary policy.”

    That reminds me of currency crises of the 1990s. In 1994 a currency crisis in Mexico (Tequila Crisis) spread to the Southern Cone and Brazil (Tequila effect.) In 1997, a currency crisis in Thailand spread to other “Asian Tigers” like Indonesia and South Korea.

    It seems “Mr. Market” is like Archie Bunker, only able to comprehend foreign countries in crude stereotypes.

    But I suspect the Asian currency crisis was actually another market manipulation scheme. South Korea was a true “economic miracle.” It started off poorer than Chile in 1973 and ended up with almost double its GDP per capita. It became a electronics powerhouse and was the only developing country to become a developed one in the post-war era. This currency crisis allowed Western investors to snatch up Korean assets at fire sale prices.

    It was disgusting to see people who put in the all hard work get it stolen from them due to a (likely intentional) market failure. People who believe in free markets are either ignorant or corrupt.

    • Chile is doing good. They offer low risk lending at 5% annual return. And the economy is doing well. Chile’s peso even outperforms USD.

      http://www.xe.com/currencycharts/?from=USD&to=CLP&view=10Y

      But the one you really want is Chinese Yuan.

      http://www.xe.com/currencycharts/?from=USD&to=CNY&view=10Y

      Fact is both these currencies, China and Chile outperform USD. Few Canadians realize the CAD didn’t rise on the USD, the USD sank in value faster than the CAD. Chinese now have a larger curreency float than the USA, yet our media doesn’t even acknowledge the largest world economy, all of Asia economy for comparisons.

      So we get the political view. Fact is in 2006/7 G8 met to decide to print no-value money for debt and caused the economic problems. The theory was for corrupt G8 central banks to concurrently print money for debt fraud. A pyramid scheme on their own currencies.

      Lots of non-G8/20 countries are doing well. And why more and more people are going offshore and forgetting that the TSX losers and lending in Canada negative value investing.

      If an investment can’t return _real inflation plus taxes, it isn’t worth investing in unless they can box you in via RRSPs and tricks.

  2. “If a central bank wants lower long-term interest rates, it’s not enough to simply promise to keep future short-term interest rates low: talk is cheap.”

    The real problem is the arbitrary 2% inflation target. It’s the reason countries like the US and Canada are stuck in a liquidity trap where the interest rate needed to bring about a real recovery is below zero. It also hangs above the economy like the Sword of Damocles: it prevents a full recovery because investors expect central bankers are too eager to get interest rates back up to normal levels and will pull the trigger prematurely killing their investments.

    Central Banks should commit to a 4% inflation target over the next 10 years. (It’s the same level of inflation we had in the 1980s.) It would ensure a rock solid recovery and a bull stock market (allowing savers to get a good return on their money.) If they don’t, we will be stuck in the same economic quagmire 10 years from now.

    As Paul Krugman puts it:

    “The point is that the conventional 2 percent target is a prejudice, nothing more; it once rested to some extent on studies suggesting that 2 percent was enough to make the zero lower bound a non-problem, but we now know how utterly wrong that view was; so we’re left with a target that’s considered respectable because it’s what all the respectable people say, and is what all the respectable people say because it’s considered respectable.

    “What do we want? Four percent! When do we want it? Now!”

    Paul Krugman: The Four Percent Solution
    http://krugman.blogs.nytimes.com/2013/05/24/the-four-percent-solution/

  3. Depends, is Stephen Poloz going to be a debt-ponzi fraud puppet of Bernanke or not? All signs says he will be. And why I am still moving more money and investments offshore for better more fair returns.

    As Canada is a negative value economy. Todays TSX, bond and lending yields are negative value. They all on average have returns well below real inflation plus taxes.

    If I lent $1000 last year, I might have $1010 this year with $10 taxable interest so a $1007 net after taxes. But real inflation is at least 6%, so I need $1060 after taxes to buy the same stuff. So before taxes, I am at least 5% less value compunding each year.

    That is negative value investing. It is why pensions want more and pay less, they are getting decimated by inflation and returns below inflation for debt fraud.

    The debt fraud is central banks printing inflationary no-value money for debt as no one is lending governemtn 1% money. Its how they force rates down, by electronically counterfeiting the currency to short legitimate lenders.

    I can get 5.65% government backed Canal bonds, why should I even look at negative value Canada (on average)? Hey, and if I move there I will even get a much lower tax rate. But if you are Chinese and can open up in China, 6% or more can be had and the Chinese Yuan is appreciating against USD and CAD for a double return.

    There is a big reason why government is concerned about offshore, more and more people are doing it. Best part too, as once I move I no longer need to declare foreign income to tax greedy Ottawa.

  4. People are going offshore as they are getting wise to the deception of the government and the central bank deception and fraud.

    Why invest in Canada if you can’t at least get real inflation plus interest for returns? I don’t mean fraud BoC inflation of 1.2%, I mean the kind of inflation you see on beef, food, property/utility taxes, insurance, housing costs, hidden taxes on spend side. You know, the big stuff included.

    I suspect real inflation is about 6 to 7%.

    So if I can’t get 8% or more in the CAD depreciating currency, I go offshore. But with TSX being a loser for 3 years, I don’t expect BoC will wake up and smell the coffee. Too much fraud politics for fraud low interest rates in a bankrupt country.

    Canada’s is bankrupt. If you add up federal, provincial, city and FN debts, add in pension shortfalls in CPP and governemtn unions, the bad debts of companies like Air Canada and CHMC bank bailout…Canada is well over $2 trillion in debt.

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