Original article here.
The European Central Bank and Bank of England are emulating Ben S. Bernanke’s experiment in offering monetary-policy guidance to financial markets. Investors could well end up being the guinea pigs.
Bond prices have fluctuated during the last three months, with the yield on the 10-year Treasury note swinging from 1.63 percent to 2.74 percent, the fastest jump since 2010, as the Federal Reserve chairman struggled to provide a clearer picture of when and why the central bank will reduce and then end its asset purchases.
“If this is science, then we’re the little white lab rabbits,” said Vincent Reinhart, chief U.S. economist for Morgan Stanley in New York, who served as the Fed’s chief monetary-policy strategist from 2001 to 2007.
More communication mishaps are likely as the ECB and BOE strive to get their messages across to the market, said Gilles Moec, co-chief European economist at Deutsche Bank AG in London and a former Bank of France official. “The potential for the dialog between the central banks and the market to sometimes fail is significant,” he said.
All three monetary authorities meet separately this week, with the Fed gathering on July 30 and 31 and the ECB and BOE announcing policy decisions Aug. 1.
ECB President Mario Draghi said July 4 that the central bank expected its key interest rates “to remain at present or lower levels for an extended period of time.” The central bank’s main refinancing rate is 0.5 percent while its deposit facility rate is zero.
F.A. Hayek, amongst others, warned of the dangers of central planning. Until currency competition becomes a reality, investors will remain part of an experiment.