The world's major central banks are returning to a more opaque and artful approach to policymaking, ending a crisis-era experiment with explicit promises that they found risked their credibility and did not substitute for action.
From Washington to London to Tokyo, the global shift from transparency to flexibility underscores the challenges central bankers face as they test the limits of what monetary policy can achieve.
The return to a more traditional policymaking approach and nuanced statements will challenge the communication skills of central bankers who have been chastened in the last year after some too-specific messages confused and disrupted financial markets.
Complicating things on the world stage, the US Federal Reserve and the Bank of England are looking to telegraph plans and conditions for raising interest rates, while the European Central Bank and the Bank of Japan are heading the other way.
“Central banking used to be an art,” said a senior official of a G7 central bank. “It became less so once, globally, but with what's happened at the Fed and the BoE, it may be back to being an art.”
Both the Fed and BoE had promised to hold interest rates near zero until their jobless rates had fallen to a particular level. However, unemployment in the United States and Britain fell much more quickly than economists expected and both central banks scrambled to replace their suddenly outdated “forward guidance”.
“Too much transparency may sometimes be counter-productive. The balance is always tricky,” the official said, requesting anonymity.
The plan had been novel. After driving short-term borrowing costs to historical lows to battle the 2007-2009 financial crisis and deep recessions, western central banks began offering pledges on the future rate path in an attempt to pull down long-term borrowing costs for automobiles, homes and business expansion.
Fed Chair Janet Yellen and many other policy makers routinely say the plan succeeded on that score, although other factors contributed. But Yellen, who was vice chair of the U.S. central bank before taking the Fed's reins, is leading the charge away from specific policy forecasts.
“The idea of forward guidance was that by being transparent, you got a bigger effect on long-term rates,” said Patrick Artus, global chief economist at French bank Natixis.
“But central banks take a risk on credibility,” he said. “If something unexpected happens, you have to deviate from what you have been
The Fed's reputation took a hit last spring when borrowing costs shot up after then Fed