Draghi tightens monetary policy

The FT has a couple good comments on today’s action, or should I say inaction:

Here’s the take from Aberdeen Asset Management investment manager Patrick O’Donnell, with our highlights:

Draghi has over promised and under delivered. Markets won’t be particularly impressed.Everyone was expecting Draghi to be the white knight for Europe once again and he hasn’t really showed up.

Today’s measures amount to tinkering around the edges. They may help the European economy a bit, particularly signalling that excess liquidity and therefore accommodative monetary policy for even longer.

But if the ECB isn’t going to do more pre-emptive measures then it is even more important that European politicians get on with reforming their economies. Europe’s economy relies on trade and the global outlook for that is pretty dire. Today measures buy European politicians a bit of time but are no panacea. Unfortunately very few European leaders have the stomach to fight for the reforms their countries need.

Says BBH’s Marc Chandler:

Ultimately, and profoundly the ECB disappointed, and this has rarely been seen in Draghi’s tenure, and hit a market that had amassed a significant short euro position over the past several weeks. As it became clear that the ECB was simply going to deliver the smaller than expected rate cut and extend the program for six months (at least), the shorts ran for what must have felt like a small exit, lifting the euro to almost $1.09.

The ECB announced the inclusion of regional bonds, but the telling disappointment was in not increasing the size of the monthly purchases.

Relative to market expectations, and to what was discounted, the ECB tightened policy. It spurred a sharp backing up of European interest rates, and substantial narrowing of the 2-year interest rate differential that had been widening with the dollar’s rise.

The bolded comments were also highlighted in the original.  It’s good to see the financial press acknowledging that a central bank move that lowers expected NGDP growth is effectively tighening policy

And another FT story gives the equity market reaction:

The euro soared by more than 1 per cent during the press conference, while regional bourses dropped.

The Euro Stoxx 50, a measure of eurozone blue-chips, sold off by 2.2 per cent. Meanwhile, Germany’s DAX fell 2.8 per cent, France’s CAC 40 slid 2.4 per cent and the UK’s FTSE 100 dipped by 0.85 per cent.

Not a catastrophe by any means, but certainly disappointing.  I overestimated Draghi, as did the markets.  But then I suppose “as did the markets” is redundant, as I’m a market monetarist.

If I say that I expect to be disappointed by the Fed in two weeks, is that an oxymoron? (Nope, but can you tell me why not?)



23 Responses to “Draghi tightens monetary policy”

  1. Gravatar of James Alexander James Alexander
    3. December 2015 at 07:17

    And he was doing so well. Still, key backward looking numbers are not too bad, Euro base money and 2Q and 3Q NGDP. Bond prices rose/yields fell, too. To be fair, probably the liquidity effect of no additional purchases. And policy remains easier than in the US where base money growth is still rubbish.

  2. Gravatar of J.V. Dubois J.V. Dubois
    3. December 2015 at 07:19

    Expecting to be disappointed probably means that there is higher than 50% chance of there being a bad result while there still is sub 50% chance to get better result and be actually positively “surprise”

    And BTW I find this as not a particularly useful way of framing things. There is nothing magical about 50% threshold. You can “expect” Brasil to beat Trinidad and Tobago in any given soccer match, but you should not be surprised to see a Brazil lose once in 100 matches. So if you are Trinidad and Tobago fan you may expect to be disappointed on some emotional level when you see your team playing against Brazil. But you should not really be disappointed as these are your expectations.

    Or to use other example – gambler in casino may “hope” or as we sometime say “believe” to win on his lucky number. But on rational levels he does not really believe this, when we define belief as a thing that you rationally expect.

  3. Gravatar of Brian Donohue Brian Donohue
    3. December 2015 at 08:03

    Barron’s with some good reporting, too:

    “Indeed, writes Paul Kasriel, the former chief U.S. economist at Northern Trust Co. who now pens the Econtrarian letter, “the Fed is about to raise its policy interest rate by a quarter percentage point in the face of slowdown in U.S. nominal domestic spending, a labor market with still considerable slack, and a preponderance of evidence of low and slowing inflation rather than rising inflation. Other major economies are experiencing weak growth and low inflation.””

  4. Gravatar of Benjamin Cole Benjamin Cole
    3. December 2015 at 08:19

    The world’s best central banker today is Haruhiko Kuroda, governor of the Bank of Japan. The rest of the central bankers are feckless fops.

  5. Gravatar of Steve Steve
    3. December 2015 at 08:29

    Ted Cruz just grilled Janet Yellen on failure to cut interest rates in September 2008, and on decision to pay interest on reserves.

    Yellen’s response to first “are you talking about 2007 or 2008?”

    On the second, she said “it’s been a critically important tool…for economic growth and price stability”

    Cruz also referenced Bernanke’s book, but Yellen said she wasn’t familiar with the passage he referenced.

  6. Gravatar of Steve Steve
    3. December 2015 at 08:37

    It was pretty funny watching Ted Cruz ask Janet Yellen to read Bernanke’s book and get back to him.

  7. Gravatar of Ben Ben
    3. December 2015 at 08:41

    I imagine you expect to be disappointed based on the 10 year yield, gold price and oil price! haha.

  8. Gravatar of Christian List Christian List
    3. December 2015 at 09:03

    “Nope, but can you tell me why not?”

    Maybe it’s because you (or in other words: the market) can’t be 100% sure until you know the decision of the FED for sure. So you / the market can’t price in 100% of the policy shock just yet even though you / they expect it.

  9. Gravatar of ssumner ssumner
    3. December 2015 at 09:18

    James, Let’s hope he’s done enough.

    JV and Christian, Yes, I was thinking of the case where there was a 60% chance of a bad result.

    Ben, That’s right.

    Steve, Interesting.

  10. Gravatar of ssumner ssumner
    3. December 2015 at 09:19

    Brian, Yes, it is kind of odd.

  11. Gravatar of Bob Murphy Bob Murphy
    3. December 2015 at 11:20

    Scott wrote:

    “The FT has a couple good comments on today’s action, or should I say inaction:”

    Oh I got this one, guys. To answer your question, no, Scott, you should definitely NOT call it inaction. You and Nick Rowe have been quite clear over the years that *given* a central bank’s existence, “not interfering with markets” is not an option. No matter what the central bank does, it is acting. So Austrians need to stop whining and start contributing to the policy discussion.

  12. Gravatar of ssumner ssumner
    3. December 2015 at 12:00

    Bob, Good point. The ECB’s lack of action in a “concrete steppes” sense constituted a negative action in the more important “stance of monetary policy” sense.

    So as for my question “Should I say inaction?” the correct answer is “no” as you say.

  13. Gravatar of More rays of light in the Euro Area | Historinhas More rays of light in the Euro Area | Historinhas
    3. December 2015 at 12:08

    […] Sumner has already opined on the undoubted tightening of monetary policy today as markets reacted negatively: the Euro […]

  14. Gravatar of TravisV TravisV
    3. December 2015 at 12:52

    Confession: I’m a little shocked at the gigantic surge in 30-year Treasury yields today….

  15. Gravatar of David C. David C.
    3. December 2015 at 13:12

    Travis…..me too, re long end of the curve. Tight monetary policy is generally bullish for the long as the long is very inflation sensitive and tight money lowers inflation. Am I missing anything here?

  16. Gravatar of Ignacio Morales Ignacio Morales
    3. December 2015 at 15:00

    Should Trichet remarks be considered also an oxymoron?


  17. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    3. December 2015 at 16:05

    @David C
    Maybe compared to the EZ, monetary policy in the US became (relatively) loose.

  18. Gravatar of E. Harding E. Harding
    3. December 2015 at 17:21

    What. Did. I. Tell. You? It’s Draghi’s ECB that tightened EZ monetary policy, not Trichet’s.

  19. Gravatar of ssumner ssumner
    3. December 2015 at 20:14

    Jose, Not likely, based on US stock prices.

    E. Harding, I said that Trichet tightened policy in 2011, not Draghi. Nothing that happened today has any bearing on that claim.

  20. Gravatar of Ray Lopez Ray Lopez
    3. December 2015 at 20:35

    Let’s assume Sumner is indeed a forecasting sage. The question for the group is: how can we make money off him? Can anybody give me ‘concrete steps’ for making money off of Sumner’s predictions? Or is it, like ‘expectations’ in economics, all ex post rationalizations and metaphysics?

  21. Gravatar of James Alexander James Alexander
    3. December 2015 at 23:03

    You are right to be puzzled by the move in bonds. The market drama in Europe at least was driven by a heavily overbought situation. Expectations had got ahead of themselves and the “Draghi always surprises” trade was very crowded. So fx rose a lot and equities fell. And bonds that had risen a lot (driving yields very negative as Scott highlighted in another recent post) fell heavily when no additional QE appeared to buy yet more bonds on top of the plans already in place. If monetary policy really had been tightened by Draghi, bonds would have risen further and yields gone more negative. The market has missed the good NGDP growth news out of Europe, but the ECB hasn’t. You do still read “Historinhas”?

  22. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    4. December 2015 at 03:40

    @Prof. Sumner
    I get that equities behaved against the hypothesis that I proposed, but equities are very volatile and SPX may reverse that movemente in a heartbeat. Bond return distributions are much more skewed, and although bond yields may well reverse too, usually, a movement of this magnitude in bonds take a long time to reverse …

  23. Gravatar of ssumner ssumner
    4. December 2015 at 14:53

    Ray, It’s impossible to make money off my predictions, as I predict the market consensus.

    Jose, Maybe, but I’ll go with the market until proven otherwise.

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