Home > Uncategorized > 2011/04/07: The Happy Banker: President Trichet Very Upbeat After ECB Rate Hike

2011/04/07: The Happy Banker: President Trichet Very Upbeat After ECB Rate Hike

Just a quick observation here on the nature of central bankers… real central bankers. You remember, those guys who are actually ready to restrain the economy when necessary. In the words of formidable Fed Chairman William McChesney Martin, Jr. (1951-1970), his job was “…to take away the punch bowl just as the party gets going.” It is with that classical philosophy in mind that we note Monsieur Trichet was certainly in fine fettle at the post-rate decision press conference. If you doubt it, have a look at the archived video of the ECB 2011/04/07 press conference. That was right after he exercised that central banker’s prerogative to ensure everyone remembers economic activity and asset inflation driven by excessive liquidity are not grounds for confidence; and if left unchecked will ultimately destroy it.

What is most striking is that other key central bankers are so immune to that precept right now. And so soon after the height of the crisis that hit with full force from a mere two-and-a-half years ago. Especially in light of the major equity market recovery, that may seem long ago in retail investor and general public perception. Yet it is not very long at all (or at least shouldn’t be) in central banker perception of economic cycles. There’s Mervyn ‘the economy’s too weak‘ King. At least he seems to have a passingly good case for ignoring what is now nothing less than sustained raging inflation; even if it is cost-push inflation, and not the more pernicious demand-pull, wage spiral sort.

Then there is that more blatant culprit, Ben ‘I never met a bull market I didn’t like’ Bernanke (with a chance he’ll now drive really ugly US dollar weakness.)

While we sympathize with the Chairman’s desire to respect the continued weakness of US housing and employment, we have the same take on that as our last post’s observations on why Monsieur Trichet was right to raise rates in spite of the strains at the periphery of Europe: it isn’t going to make a difference.

How much difference is it actually going to make to US housing if the Fed takes the Fed Funds rate from 0.25% to 0.50%? Almost all of that is funded at the long end of the yield curve. And the Fed’s focus on supporting prices (i.e. suppressing yields) in the 10-year government bonds has only been marginally successful. The same goes for employment. We’d be glad to admit our error on that one… if only someone could explain how exactly does free money accomplish the retraining and hiring of all the medium-to-low-skilled workers whose employment vanished with the serial loss of manufacturing and then construction jobs into 2008-2009?     


So maybe Monsieur Trichet was so upbeat because he was happy to do what he knew needed to be done in spite of all the naysayers and Cassandra’s. Of course, he always waxes most eloquent when discussing the German success story; flashing happy-happy on how good it is they are no longer discussing it as the ‘weak man of Europe’. That said, he also seems to imply this is good model for the fiscal and economic reform of the rest of Europe. Let’s just leave it for now that the chance the weak sisters on the periphery of Europe will morph into export powerhouses is about the same as windmills replacing fossil fuels in our lifetime.

As a final word, lest it escapes anyone’s attention, the sustained US central bank ‘free money’ and expansive liquidity program also has the potential to drive even more US dollar ‘carry trade’ pressure. This might seem just the next convenient reason we are citing to reinforce our significantly negative US dollar view. Yet, consider for a moment that the strength in the Japanese yen is likely to be sustained in the near term on the post-crisis ‘repatriation for reconstruction’ flows (see Australia for a forward looking similar example) in spite of recent weakness.

That leaves only the US dollar as a clear source of carry trade funding. The low yields in the UK are more suspect due to the greater risk the BoE will finally succumb to sustained inflation pressure and hike base rates. That risk of rate moves against carry trade borrowers is a potent deterrent. Not likely anyone will be borrowing in euros (and then selling them down) for that purpose anytime soon; regardless of whether ECB hikes again in three months.  

Thanks for your interest.

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