Whenever something really bizarre happens some people look for deep explanations. Conspiracy theories. There must be inside information. Etc., etc. Sorry, but sometimes the obvious explanation is the right one.
Yesterday I read dozens of comments from pundits all over the world on the SNB’s surprise abandonment of the currency peg. Every single one thought it was a stupid move. The markets thought it was a stupid move. I thought it was a stupid move.
Many of the theories I see commenters putting forward are based on public information. Keep in mind that everyone knew the ECB was likely to do QE. That was already priced into the euro/dollar exchange rate. And the markets still expect deflation in the eurozone, despite the recent depreciation of the euro caused by expectations of QE.
The explanation for the SNB move is quite simple—stupidity. It’s stupid to throw away 3 1/3 years of credibility. I won’t even say “hard-earned credibility,” as it was pathetically easy to peg the SF for 3 1/3 years. The SNB will now miss their price level target. (Actually they were already going to miss it—the currency was too strong at 1.2.) They’ve also thrown away one of their most powerful monetary policy tool, exchange rates. They will now rely more on QE, exactly what they were trying to avoid with the currency peg. Even if they thought the SF needed to be a bit stronger for some bizarre reason, why not appreciate it by 5% and then re-peg? Why let the SF rise by more than 15% against a currency that is itself plunging into deflation? That makes no sense.
I sometimes receive back channel communication from very-well informed people in Europe. Believe me, just as with the earlier nonsense in Sweden, there is no “rational explanation.” People are appalled.
But there is a lesson here. Just as war is too important to leave to the generals, monetary policy is too important to leave to the central bankers. Once again we see the markets are way ahead of the central bankers. One more example of why we need market monetarism. Let markets determine the money supply, interest rates and exchange rates. Peg your currency to NGDP futures prices. And if you are not going to do that, then for God’s sake level target SOMETHING.
PS. After writing this post I came across a Tyler Cowen post that speculates the SNB might know something we don’t know. I could not disagree more strongly. There are very few secrets in the world of central banking. The Swedes didn’t know something we don’t know a few years ago when they foolishly tightened to stop “bubbles.” Nor did the ECB when they tightened monetary policy sharply in 2011. Nor did the BOJ when they tightened in 2000 and again in 2006. Tyler says the following:
The Swiss central bank, had it continued the peg, probably would have had a balance sheet larger than Swiss gdp. But does this matter?”
Actually, growth of the balance sheet slowed sharply after they adopted the 2011 peg. Without the peg they’ll have to rely on QE. So Tyler’s worry about the size of the balance sheet is actually an argument for keeping the peg. (And/or also an argument for a higher inflation target in Switzerland.)
PS. If you’ve ever wanted to boss me around, here’s your chance. (If MF or Ray get the job, I’ll shoot myself.)