davies77_THOMAS LOHNESAFP via Getty Images_christine lagarde speech THOMAS LOHNESAFP via Getty Images

The Mismanagement of Inflation Expectations

The leading central banks appear to have lost control of consumers’ inflation expectations, and the costs could be high. If wage increases accelerate over the next quarter, monetary policymakers will be obliged to respond firmly by raising interest rates sharply, or else lose even more credibility.

EDINBURGH – Central bankers are not required to be great wordsmiths. The ability to craft elegant paragraphs is not normally in their job description. Until recently, many leading monetary policymakers operated on the “least said, soonest mended” principle. Montagu Norman, the governor of the Bank of England from 1920 to 1944, lived by the motto “never explain, never apologize.” Similarly, former US Federal Reserve Chair Alan Greenspan once proudly observed that he had “learned to mumble with great incoherence.”

But those views are now passé. Senior BOE officials made, on average, a total of just 13 speeches a year in the 1990s. In the last decade, the average was over 80, and the trend line points upward. A similar pattern can be observed at other central banks.

That is not because central bankers now yearn to be public figures; privately, many would prefer the Norman approach. But an inflation-targeting regime is thought to work through clear and credible management of expectations. Persuade economic actors that you will hit your target most of the time, and they will do part of your job for you by moderating their wage demands and maintaining stable prices.

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