Fisher Investments UK Reviews the Limits of Monetary Policymakers’ Chatter

As inflation (broadly rising prices across the economy) ran hot globally last year, we observed something else run hot: chatter about potential monetary policy.[i] Across the Atlantic, US Federal Reserve (Fed) Chair Jerome Powell’s interest rate discussions often captured headlines in publications we follow. In Europe, monetary policymakers from the European Central Bank (ECB) and Bank of England (BoE) received similar attention. Analysts we follow tend to dissect monetary officials’ words, looking for hints of possible changes. But in Fisher Investments UK’s view, investors benefit from resisting the urge to act on monetary policymakers’ words, as they don’t predict forthcoming policy changes, let alone future economic conditions.

Fisher Investments UK’s reviews of history show monetary policy officials often stray from their forward guidance, or hints at future action. For example, in November 2021, ECB President Christine Lagarde stated, “conditions to raise rates are very unlikely to be satisfied next year” – yet the ECB hiked rates four times in 2022.[ii] Similarly, in December 2012, former US Fed Chair Ben Bernanke said rate hikes were off the table until the unemployment rate fell to 6.5% or lower.[iii] But as unemployment neared that threshold in March 2014, the Fed voted to remove its 6.5% target, saying it was outdated.[iv] We cite these examples not to criticise monetary officials, but to suggest predicting human decision is impossible. New information can influence their outlooks, so in our view, investors don’t benefit from interpreting officials’ prior comments and decisions as ironclad.

Moreover, many financial publications Fisher Investments UK follows often use a bank governor’s name as a stand-in for the whole institution. Yet Lagarde’s opinions aren’t necessarily indicative of what all ECB officials think – just as Powell or Andrew Bailey don’t speak for all Fed and BoE policymakers, respectively. Other members may hold different views. For example, BoE member Catherine Mann publicly called for faster rate hikes – citing concerns over the pound’s value – after the Monetary Policy Committee voted to maintain its 50 basis point hiking path at February’s meeting.[v] Committees determine monetary policy – so any official, including the governor, represents just one vote of several.

Fisher Investments UK knows these decision-making bodies also experience regular turnover, making it unclear who will contribute to future decisions. In America, two new members will rotate into the Federal Open Market Committee (FOMC) as Vice Chair Lael Brainard and Kansas City Fed President Esther George depart.[vi] The FOMC also includes a rotating cast of regional Fed branch governors, as 4 votes rotate amongst 11 Federal Reserve Presidents each year. The Bank of Japan (BoJ) will also make committee changes this year, with academic Kazuo Ueda the BoJ’s next governor and Ryozo Himono and Shinichi Uchida as new deputy governors.[vii]

Fisher Investments UK’s review of history has found monetary policymakers’ ability to achieve their stated goals is overstated. In our experience, many commentators argue these institutions can influence economic growth through monetary policy on the presumption that the benchmark monetary policy rate represents banks’ cost of money, and raising or lowering it can therefore directly slow or speed economic growth and inflation. They also presume long rates move in tandem with policy rates. Based on this rationale, if monetary policymakers raise rates, money becomes more expensive – and thereby less available. That then weighs on growth, leading to hiring slowdowns, higher unemployment and lower inflation.

But our analysis shows monetary institutions’ policy rates don’t always determine the cost of money. Consider: Fisher Investments UK’s reviews of monetary policy institutions’ balance sheets show that several major economies currently hold more deposits than they do outstanding loans – e.g., US commercial banks currently hold $5.6 trillion more in deposits than loans.[viii] This glut means banks don’t have to compete for deposits by raising customers’ deposit rates – and gives them access to cheaper funding, dampening the effect of policy rate changes.

Meanwhile, long-term loan rates typically derive from long-term government bond yields. Monetary policy institutions’ long-term asset purchases and sales can have some influence, but the broader global bond market determines interest rates – which we find are tied to inflation expectations. Money supply growth stems largely from loan growth, which Fisher Investments’ research finds is generally based on the gap between market-set short- and long-term rates – a wider gap would mean more lending to support growth, as it would mean lending is more profitable. We think monetary policy institutions can influence this by adjusting required reserves, but consider: the BoE doesn’t have a minimum reserve requirement, and the US Fed scrapped theirs entirely in 2020.[ix] The ECB requires around 1%.[x] So we think it stands to reason monetary policymakers have little influence over how much money circulates through the broad economy – another point to not overemphasise the importance of what they say.

Disclosure:

This document constitutes the general views of Fisher Investments UK and should not be regarded as personalised investment or tax advice or a reflection of client performance. No assurances are made that Fisher Investments UK will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. Nothing herein is intended to be a recommendation or forecast of market conditions. Rather, it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. In addition, no assurances are made regarding the accuracy of any assumptions made in any illustrations herein. Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square (NYSE:SQ), Canary Wharf, London, E14 5AX, United Kingdom. Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission.

Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission. Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.