“Central banks cannot simply move economic growth and employment to a desired level. Monetary policy (cannot) replace a sustainable growth policy, a well-balanced fiscal policy, a well functioning labour market, or an open world trade regime. It is important to avoid illusions in this respect. Monetary policy cannot assume responsibility for everything.”, Thomas Jordon Chairman, Swiss National Bank

“I encourage you to read the Swiss National Bank Chairman’s January 16, 2014 speech: “A new role for central banks?” or its summary (or the excerpts I have highlighted) below. Then read incoming Fed Chairwoman Janet Yellen’s January 20, 2014, Time magazine profile or read my blog posting Statement #111. After reading Chairman Jordan’s speech, I think the Swiss Central Bank provides an outstanding example of a realistic and prudent central bank. In direct contrast to the Federal Reserve. (In fact, if you read the speech carefully, Chairman Jordon takes several jabs at the Fed’s policies, without mentioning them by name.) I don’t think it’s the Fed Chair or the Fed Governors who are the primary problem. While Chairwoman Yellen is probably more “full employment” and less “price stability” than past Fed Chairs, she is not that different than either Chairman Bernanke or Greenspan. As I have said before, I believe it is the Fed’s dual mandate that is the problem. (A mandate that no person can dispute if they want to be confirmed as a Fed Chair or appointed as a Fed Governor.) This well-intended dual mandate, I believe causes unrealistic expectations for U.S. monetary policy, which in turn creates monetary instability; a major cause of the most recent financial crisis.”, Mike Perry, former Chairman and CEO, IndyMac Bank

Excerpts from Incoming Federal Reserve Chairwoman Yellen’s January 20, 2014 Time magazine profile:

“I’d like to see real wages going up,” Yellen says, adding that the average American male worker’s inflation adjusted wages have been flat or down for the past 20 years.

Those words may not sound uncommon, but in an institution where people often speak in algorithms rather than English and live in a statistical bubble, Yellen’s focus on the human impact of economics is a true shift. Central bankers have, as she puts it, “an important role in public policy and a moral responsibility to take part in it.” The job, as she sees it, “isn’t just about fighting inflation or monitoring the financial system. It’s about trying to help ordinary households get back on their feet and about creating a labor market where people can feel secure and work and get ahead.”

Excerpts from Swiss Chairman Jordan’s January 16, 2014 speech, “A new role for central banks?”:

“…..On the contrary. Their job is to fulfill their statutory mandate, whereby in most cases the focus is on price stability. That is also the case for the Swiss National Bank (SNB), whose mandate is sensible and credible, and can be fulfilled.”

“What also appears important to me is that central banks do not take on tasks that they cannot tackle with their existing instruments, thereby awaking false expectations and hopes. To ensure that monetary policy remains effective, it is important that central banks do not depart from their mandate of price stability. If expectations are too high, central banks are bound to disappoint them in the long run. This will cause them to lose credibility in their core area, and this could lead to politicians becoming involved. In this situation, central banks’ independence would be at stake. Caution is to be recommended with respect to monetary policy trends. Certainly, the SNB will not simply go with the general flow, but will instead pursue its own path tailored to the needs of our country.”

“To put it somewhat bluntly, this fallacy can be described as follows: Now that central banks had done so much to save the economy and the financial system from collapsing, they should be permanently in charge of ensuring sound economic growth, high employments, low interest rates and a healthy real estate market.”

“Such extremely high expectations are exceedingly dangerous. Central banks would be forced into a role in which they had to fulfil tasks for which they neither have the requisite responsibilities nor the appropriate instruments. As a result, other agents could be induced to neglect their responsibilities.”

“What can central banks do to counter such unrealistic expectations? They can, for instance, communicate clearly and emphatically what their role is and where their limits are.”

“Third, it is suggested that further criteria be added to price stability…relating to employment and growth, for instance. Growth and employment are, of course, essential economic parameters. Our mandate take them into account with its reference to the development of the economy. However, specific requirements with regard to growth and employment would, once again, raise expectations which the SNB could not meet in the long term. Instead, the goal of monetary policy with respect to the economy must be to reduce larger risks and alleviate extreme situations.”

“Monetary policy is not suited to fine-tuning the economy, however. In practice, we have learned that is impossible to conduct monetary policy which responds immediately and in a differentiated manner to all kinds of business cycle fluctuation. Neither can monetary policy replace a sustainable growth policy, a well-balanced fiscal policy, a well functioning labour market or an open world trade regime. It is important to avoid illusions in this respect. Monetary policy cannot assume responsibility for everything.”

“Nevertheless, no central banks should simply jump on the latest monetary policy bandwagon without careful consideration. On the contrary. Changes must be undertaken with great care.”

“In the long run, a central bank can only pursue an autonomous monetary policy in line with the needs of its country if it is independent….What independence also means, however, is the responsibility to use this freedom strictly within the meaning of the statutory mandate, no matter what the prevailing political climate may be. Independence cannot be taken for granted, it is a privilege…..As a counterweight to its independence, the SNB has a duty of accountability and information with respect to parliament and the public. The SNB is thus firmly anchored in our constitutional democracy. In a free society, an authority with a complete free hand would be a foreign body.”

“Yet independence must be lived. The SNB may not accept instructions from political authorities; neither can it allow itself to be put under pressure by public opinion. It must conduct a monetary policy that serves the interests of the country as a whole, to the best of its ability, and in accordance with its mandate. It is only natural that our monetary policy cannot please everyone at all times. However, an independent central bank must not be put off by this.”

“Central banks should not be pushed into a role which awakes false expectations and hopes. In the long term, a central bank makes the biggest contribution towards a prosperous development of the economy if it is guided by a clear mandate towards a prosperous development of the economy if it is guided by a clear mandate and consistently discourages excessive expectations. By fulfilling its price and financial stability mandate reliably, it builds up confidence in the general public and on the markets….confidence which is so important for the economy.”

“However, there is another area in which the Confederation and cantons have made an even more important contribution to the independence of monetary policy. They put the favourable years before the crisis to good use by making their public finances pretty weatherproof. As a result, Switzerland was one of the few countries where government finances did not deteriorate substantially in the crisis. Sound government finances are essential not only for the competitive strength of an economy but also for safeguarding social security institutions…and thus for social cohesion. In the long term, excessive government indebtedness can also endanger price stability and the independence of monetary policy; one reason for this is that it increases the temptation to keep interest rates very low for longer than necessary.”

“I am firmly convinced that no change is needed in the SNB’s current mandate and therefore with regard to its fundamental role in monetary policy. Our job is to ensure price stability while taking due account of economic developments. This is a sensible and credible mandate. Our clear definition of price stability has also stood the test of time. The SNB equates to price stability with a rise in the national consumer price index of less than 2% a year.”

“Consequently, it is clear….and well-established historically….that central banks make an important contribution to financial stability. In fact, several central banks were founded specifically for this purpose. The idea was that the central bank should serve as the lender of last resort, thereby protecting the banking system from collapse. In Switzerland, the SNB has always been the lender of last resort.”

“Ladies and gentlemen, we have reached the end of our perusal of monetary policy and financial stability. I particularly wanted to show you which roles can and cannot be assumed by central banks and especially by the SNB.”

“A central bank which is guided by this model when fulfilling its mandate and consistently discourages excessive expectations makes the biggest contribution towards a prosperous development of the economy, thereby serving the overall interests of the country in the best manner. By fulfilling its price and financial stability mandate steadily and reliably over a longer period, a central bank builds up confidence in the general public and on the markets….confidence which is extremely important for the development of the economy.”

Summary: “A new role for central banks?”, Thomas Jordan, Chairman of the Governing Board of the Swiss National Bank, January 16, 2014

Complete Text: “A new role for central banks?”, Thomas Jordan, Chairman of the Governing Board of the Swiss National Bank, January 16, 2014

Posted on January 23, 2014, in Postings. Bookmark the permalink. Leave a comment.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: