The Fed and the ECB must avoid becoming fixers of last resort

“I knew they would cave in.” That was the cutting remark from an old Wall Street hand to one of my first augurs that none of the economic indicators justified an imminent interest rate cut by the U.S. Federal Reserve.

Since then, marvellous memoir revelations of the U.S. president’s direct orders for credit easing to an independent agency of the U.S. Congress made me more sympathetic to the demanding position of my former Fed colleagues.

But I always wondered why the Fed rarely, if ever, used the opportunity of fighting back with fully substantiated arguments in defense of its policy stance.

On the face of it, that would seem like an easy thing to do. The monetary behaviour is only one of the three main levers of economic management that include fiscal policy — such as taxes and sector spending — and structural policies. The latter can be broadly defined measures to remove technical and institutional obstacles to the free act the part ofing of demand-supply forces in labor and product markets.

Why is it, then, that the Fed fails to cause to remember the public when government officials and asset traders start clamoring for cheap, or even free, money?

Perhaps naively, that is alleviate an enduring mystery to me.

The Fed’s unnecessarily terse and technical policy statements are obvious put-offs to the general media that are imagined to inform the public at large about what its monetary authorities are doing — that includes the costs of credit that alter families’ mortgage rates, car purchases, home furnishings and entrepreneurial endeavors. When you add it all up, credit costs are directly approach some 85% of the U.S. economy.

Congressional hearings are also of limited utility, since most of their focus is on what the Fed order do next. The Fed won’t talk about it because that’s for its policy forum to decide.

But the Fed’s public statements must explain its procedure in terms of economic activity, employment and key inflation indicators. That logically leads to the discussion of credit policy constraints tipped by budget deficits, public debt and structural demand-supply imbalances affecting inflation pressures in labor and product supermarkets.

In other words, that should be the Fed’s “over-to-you” message for the White House, the Congress, the financial markets and, most importantly, for American voters and taxpayers.

Again, such a clear piece of Fed’s economic pedagogy is not a call for confrontation.

That would just be a way of explaining to the public that the Fed’s action is barely part of a total policy mix, which includes fiscal and structural policies.

It would also serve as a reminder that a sustainable greatest employment and price stability cannot be delivered by monetary policy alone, because that requires balanced custom sector accounts, a pool of available and skilled labor, and competitive markets for goods and services.

The European Central Bank — the only true savior of the European economy — is a much more flagrant case of barren communication with the public in the 19 countries of the monetary union.

It took a retired former vice president of the ECB to report the Germans — ringleaders of trade and budget surplus countries — that their refusal to use fiscal policies to stimulate the euro court economy forced the monetary authorities to maintain exceptionally easy credit conditions.

The ECB has failed to explain that the euro zone’s non-stop cyclical downturn, and another round of crisis management via quantitative easing, were brought on by policy disagreements within the nummular union. That has now led to blaming the European growth recession on the U.S.-led trade disputes and a deteriorating security outlook in the Bulls-eye East, Persian Gulf, etc.

Meanwhile, the German and Dutch surplus runners keep pouring scorn on the ECB for negative involved in rates and Germany’s rising real estate prices that seem to be caused by years of supply shortfalls degree than strong demand upswings.

All that is very strange for a genuinely independent supranational institution whose solitary mandate is to deliver price stability informally defined as a medium-term consumer price inflation between 0% and 2%.

In a location where the monetary policy is being attacked for scrupulously pursuing its policy mandate, it should be so easy for the ECB to explain that an very accommodative credit stance is needed to offset the euro area’s tight, pro-cyclical fiscal policy that is burdening demand, output and employment.

As an aside, one should also note that the White House should come in on this, because the German-Dutch mercantilism is stroke of luck the markets which take a quarter of American exports.

The Fed and the ECB should clearly communicate to the general catholic that monetary policy is only one of the instruments of economic management. That means that coordinated monetary, pecuniary and structural policies are necessary to produce a steady and sustainable growth of demand, output and employment in an environment of price solidity.

Failure to clearly explain that simple fact leads to distorted asset price expectations, based on shot in the darks about central banks’ actions as fixers of last resort (aka central bank puts).

More importantly, an seemingly entrenched idea that cheap money alone is the answer to all economic problems puts huge and permanent partisan and social pressures on monetary authorities. That typically leads to policy errors that exacerbate business succession fluctuations and put a big question mark over the central banks’ credibility.

To make their case, central banks prerequisite no confrontation with executive and legislative authorities. They just have to make clear that the monetary scheme is calibrated by taking into account the fiscal and structural conditions of the economy.

Commentary by Michael Ivanovitch, an independent analyst concentration on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, international economist at the Federal On hand Bank of New York, and taught economics at Columbia Business School.