Why Draghi May Avoid a Key Word When Talking About the ECB Bond Plan
October 24 2017 - 05:59AM
Dow Jones News
By Paul Hannon
When the European Central Bank explains how it will reduce its
bond purchases, it will be at pains to avoid the word that everyone
else uses: tapering.
ECB President Mario Draghi will confront his latest linguistic
challenge Thursday, when he is expected to announce that he and his
24 colleagues on the governing council have agreed to reduce their
bond purchases from January.
Investors, traders and analysts who follow the ECB's actions are
already describing this anticipated move as "tapering." But that is
not a phrase Mr. Draghi is likely to employ. That is because the
watchers are anticipating the termination point for a journey that
Mr. Draghi may not want to admit he is on.
The term entered popular use when then U.S. Federal Reserve
Chairman Ben Bernanke first suggested the U.S. central bank was
planning to reduce its bond purchases in June 2013. The subsequent
sharp drops in asset prices around the world became known as "the
taper tantrum."
Mr. Draghi has already offered his definition of the term when
explaining why it wasn't the right way to describe the central
bank's December decision to cut its monthly bond purchases to EUR60
billion from EUR80 billion.
"The word has several meanings depending on who is using it, but
the natural way to look at a word like that is to have a policy
whereby purchases would gradually go to zero," he said at a news
conference held to explain the move. "And that's not been
discussed. As a matter of fact, it's not even been on the
table."
When Mr. Draghi does want to talk about how the size of the
bond-buying program might change, he uses the word "calibrate." So
rather than announcing a tapering of its program on Thursday, the
ECB will most likely talk about "recalibrating" its purchases.
There are reasons for its choice of words. Firstly, ECB policy
makers are unlikely to be certain that they can end the program by
a particular date. In addition, they may not want to give the
impression that ending the program is a goal in itself, as distinct
from finding the right policy settings for the economic situation
as it evolves. Tapering will be something that becomes visible in
the rearview mirror, rather than a destination programed into the
navigation system.
Secondly, there is a downside for central banks in being too
clear about where they are likely to end up. Investors and traders
have a tendency to jump ahead to the next thing, and once it is
firmly established that quantitative easing is being wound down,
they will likely focus on when the ECB's key interest rate will
start to rise. That could push up borrowing costs more quickly than
the ECB would like.
If the Fed's experience is a guide, it will be a challenge for
the ECB to keep investors and traders in the here and now. Back in
2013, Mr. Bernanke didn't use the word "taper" when his comments
sparked the notorious tantrum. Indeed, he said pretty much what Mr.
Draghi is likely to say.
"A step to reduce the flow of purchases would not be an
automatic, mechanistic process to end the program," Mr. Bernanke
said.
Even when the Federal Reserve embarked on a reduction in bond
buys that did taper to zero by October 2014, it was careful not to
fully commit to such a course. In their December 2013 statement,
the Fed's policy makers said that while they were likely to "reduce
the pace of asset purchases in further measured steps at future
meetings," they were "not on a preset course" and subsequent steps
would depend on economic conditions.
Back then, as now, investors and traders have concluded that
central banks are on a path back toward more normal policy
settings. In the ECB's case, they are also very aware that the
central bank is soon going to run out of bonds to buy if it sticks
to its self-imposed rules.
So there is really no other direction to go in. Like the Fed,
the ECB is likely to stress that it hasn't set a firm trajectory
for its bond purchases. What the markets will likely hear is
"tapering."
Write to Paul Hannon at paul.hannon@wsj.com
(END) Dow Jones Newswires
October 24, 2017 05:44 ET (09:44 GMT)
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