People want to BELIEVE. Wall Street, the City of London, they WANT to believe. Sure there are critics and they are treated as heretics. But the core of the financial world WANTS to believe in central bank magic. Lord knows the political world does.
The central bankers simply must be right. They just have to be. Surely the shamans are wise. Surely they know something we do not. Surely they know what they are doing. Surely, even when they are wrong they are right.
Thing is, right or wrong they move the markets so one has to pay attention. “Don’t fight the Fed” is generally good advice. But know that the universe is much bigger than the central banks.
(From Real Clear Markets)
Calculated HICP inflation in Europe peaked, coincidentally, in July 2008 though not for the reasons suggested by Trichet and his monetary policy views. It should be quite distressing that supposed experts about monetary conditions and how they relate to the real economy could be so wrong about, well, everything. This is all the more so given that the US Federal Reserve and Bank of England took the opposite approach and still ended up in the same place anyway. In other words, no matter which direction any central bank took, none of it mattered; markets and the global economy crashed regardless of any monetary policy setting.
There was entirely too much faith in their own abilities, as the Financial Times described concurrent to the ECB’s July 2008 rate hike:
“Mr Trichet’s shock announcement last month that the Frankfurt-based central bank was mulling an interest rate increase highlighted the change in mood among global policymakers away from concerns about the impact of the financial market crisis on growth to focus more on rising inflation risks.”
They, meaning any central banker, really thought that the events surrounding Bear Stearns was the worst of it and that all the powerful “stimulus” (in the US that meant “huge” accommodation of bringing the federal funds rate target all the way down to 2%!) would lead the economic charge into the immediate future where all the bother of late 2007 and early 2008 would be quickly forgotten. Instead, what was forgotten was how monetary policy had been revealed and proven futile.