Is Central Bankers’ Job Such an Impossible Task?
Legend has it that Sisyphus, the father of Glaucus who was King of Ephyre, now Corinth, is known to have taken on an impossible task for eternity. It was, however, against his will. He served, or may still be serving, a punishment inflicted upon him by Hades, the King of the Underworld, for having betrayed the secret of Zeus, Hades's brother. Therefore, for such betrayal, he was sentenced, in hell, to forever roll a rock uphill, which rolled back upon him. Hades would then force Sisyphus to roll the boulder up again and again for eternity. Such was an impossible task, for Zeus wanted all immortals and mortals on earth, sea, and up in Olympus to know what awaits them should they ever betray him again. As for the King of the Underworld, Hades, he wanted to assert himself and to prove to his big brother that although he only ruled the dead and everything else underground, he still could creatively come up with a punishment suitable for those brought alive from Earth.
Now when I speak of impossible tasks, I cannot help but think about modern central bankers. I have followed central banks' monetary policies around the world for a long time. Although every central bank chairperson has a different style of getting their policies across, the central bank's goal is simple. They aim for two distinct objectives: to achieve full employment, and to maintain price stability. That is all. Simple right? You would think. In my ten-plus years of immersion in exhausting minutiae of central banks' businesses, especially the U.S. Federal Reserve's, the Bank of Japan's as well as the European Central Bank (E.C.B.) which oversees the entire euro system, I grew to understand what a difficult task central banks must put up with. First, they must strive to stay independent, meaning to avoid being swayed by politicians in office. Then, like Sisyphus, they must undertake almost an impossible task to achieve full employment while maintaining price stability i.e. low inflation.
Before I go any further about central bankers' fate, I want to reminisce of an agonising experience I had with some of the past heads of the U.S. Federal Reserve in my attempt to decipher their game theories on top of game theories. At one point, I thought they do it on purpose just to exhaust us into submission so that we do not ask them questions (most of the time they don't know the answers). I started watching Bern Bernanke, then chairman. The man's press conferences bored me such that I chugged mugs of coffee just to make it through. I drank so much caffeine that my body grew immune to it. The man could say everything without telling anything. Then came Janet Yellen whose monotonic voice put me to sleep instantly. With her, coffee wasn't doing it anymore. It was like listening to a soothing lullaby. She wore out my attention span such that I still blame her for my current aversion to attending conferences (I sometimes blame it on Obama, too). Then came Jerome Powell. When he got appointed by Trump, Wall Street was excited because with Powell, being a Wall Street veteran himself, we thought he will speak the language we can understand. Mr. Powell's empirical approach gave us a full sense of understanding of the Fed's intentions. On his first press conference, I tuned in, clang onto every word out of his mouth, and an hour later my coffee was cold and untouched. I understood him perfectly. At the end of the conference, my first reaction was like the one Napoleon had when he saw Goethe's performance for the first time. "Voilà un homme!" Napoleon shouted. I have followed Powell's press conferences since then. For the E.C.B., I never understood Mario Draghi, though I like Christine Lagarde's communication style. Under Draghi, I would just read the Financial Times or Wall Street Journal for their dissection of what he said. As for the Banque Nationale back in Rwanda, my homeland, I never get a chance to listen to their live monetary policy press conferences. I usually catch up with the watered-down version of what they said from one of the local daily journals.
Traditionally speaking, most central banks strive to find a balance between a fairly decent employment level and keeping inflation at bay. What separates a great central banker from a good one is finding that fine balance. What level of the unemployment rate is acceptable versus what level of inflation is tolerable by consumers and the economy? First let me say that "full employment" cannot be achieved because, by definition, that means there is zero unemployment. The truth is there is no such thing as zero unemployment in a functional modern economy. Someone is always looking for a job. On any given day, someone new is entering the labour force while existing workers are looking for high wages or better working conditions. Then come entrepreneurs and innovators or governments who, on any given day, are also opening new positions to be filled. So, attempting to achieve full employment, as most central banks do, is like Sisyphus trying to roll a boulder uphill (not possible) because just as the boulder keeps rolling back down, when the economy gets hot and hotter, it gets overheated and inflation goes through the roof, which calls for the central bank to launch hawkish policies, which tighten labour market i.e. lower employment levels.
So what level of unemployment is acceptable? It varies. But my cookie-cutter answer is that when the economy cannot create, at the very minimum, enough jobs to accommodate new entrants into the labour force, it is very bad news already. Because once a new labour force cannot even be employed, it gets even worse when you add those working part-time but actively looking for full-time jobs. Not to mention those who have stopped actively looking because they gave up but are still unemployed. Although those quitters are not usually included in unemployment statistics, they still rush back in active search when the labour market becomes attractive again, which keeps the unemployment rate high even when the economy is actually in expansion.
On another hand, let's say we have plenty of jobs for everyone who wants one. That is equally bad news for the central bank. Because when there are more jobs opening than there are job seekers, employers start competing for workers by offering them unrealistically higher wages which triggers other workers to ask for even higher wages. And the cycle goes on and on. At his wage level, two things happen. First workers making more money than before will adjust their lifestyle and go out on a shopping spree. More spending can sometimes lead to high prices because shoppers are competing for goods and services especially when certain goods supplies cannot keep up with rising demand. Higher prices lead to high inflation and the central bank once again got to intervene to tame it. The other thing that may happen when wages rise too fast is that corporate cost increases, which is either transferred to consumers, hence high prices; or eaten into corporate profits. When profits decline, employers start laying off workers to cut costs, which once again increases unemployment. Details are much deeper than this but you get the idea.
All that being said, the central bank's job is to have policies in play which encourage employment when the level is not high enough, discourage employment and curb inflation when the economy gets overheated and prices rise, or do a bit of both. What if prices rise and unemployment is also too high? In this case, any efforts to curb inflation via monetary policy can tip the economy into a downward spiral. And that is where bankers' talents and their ability to sure up confidence come in. It is all about finding the right balance. Central banks achieve this mission by using their monetary policy tools — either by increasing, if not decreasing, money supply via quantitative easing or raising, if not lowering, banks' reserve ratios or benchmark interest rates. Simple right?
The issue rises when central banks start being swayed by politics or market sentiments. Here I will focus on market sentiments since I do not have evidence of central banks being politically motivated (not to mean they never are, I just have no evidence of it). Lately in the USA, J. Powell seems to struggle to achieve his inflation target. Not even close. He is afraid of tightening too fast and crashing the stock market or tipping the economy into recession. First of all, the market and corporate profits are currently running on fuel from cheap money or even free money that's been pumped in for years, but most outrageously during the pandemic. I agreed with the policy of a little bit of government intervention when COVID-19 hit us, but God knows they went overboard. They essentially gave handouts to anyone who would take it. As a result, so many businesses have not organically grown through innovation and optimal corporate management. They are running on free fuel and easy access to credit supported by very low rates. Their growth was artificially induced beyond the realm of normalcy. Now the Fed is afraid that if rates go much higher, the credit will get too tight and some businesses may fail. In a free-market economy, at one point you got to let capital dictate who is to survive because free capital goes where it is to be fully optimised. Governments and central banks aren't supposed to keep intervening and patching up leaking boats. To artificially dictate where and how capital should move not only prevents central banks from doing their job efficiently, as it is supposed to be done, but also causes numerous market inefficiencies elsewhere. It also hinders capital from finding new and innovative ideas.
Sometimes you got to let inefficient capital users fail so that they can find their rather efficient new niche. Jobs will be lost on one end and created elsewhere. Someone once asked, "What do you call a trained accountant who drives a taxi?" Is he an unemployed accountant or an employed taximan? My answer is it doesn't matter what hat he wears but if he must wear one, he is an employed taximan. Capital may have moved from, or may have refused to move into, a poorly run accounting practice and found efficiency in taxi service. That is why he is, willingly, driving a taxi as opposed to reconciling inventories.
So, for the central bank's task, I say just follow the data, and do what you know, and how you have trained to do it. In Europe, Christine Lagarde is in even a hotter seat than Powell. Not only her E.C.B. policies must take into account wide-range of independently run economies, with Germany and France on the healthy end of the spectrum while Greece, Spain, Portugal, and others are on life support, but she also indirectly has to weigh in on what these independent countries are doing on their own at home. It is a daunting task indeed.
My unsolicited advice to central bankers (yes, I know the fate of a monk who was put to death by Ivan the Terrible for delivering unsolicited and moralising advice, but I will give it anyway) is to just keep it simple. Go back to fundamentals: Maximum employment can be achieved while maintaining price levels low enough to align with wage growth. The rest, whether or not the stock market rise or falls in response to policy decisions, is up to investors to decide where capital is to move to. As for fear of some poorly run businesses going under, due to high rates, leave it up to the invisible hand to correct. Do not try to anticipate the future because you cannot get it right anyway; definitely not all the time. Set the capital free, let it find its course. The last thing we want from you is to suffer from paralysis by analysis.
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