Central bank credibility

The RBA left rates unchanged last night, much as Macro Man expected.   The statement was fairly balanced, acknowledging both the modest improvement in economic activity and the ability to trim rates further should circumstances warrant.  Clearly some in the market were looking for cuts, given the decent squeeze in the AUD at the time of writing.   The RBA appears willing to be guided by the evolution of the economy without rushing to judgement over short-term developments....a decidedly credible approach.

For many years, the idea of central bank credibility revolved around an institution's ability and willingness to meet some sort of policy goal, normally around inflation.  Indeed, the whole notion of inflation targeting evolved as a means of enshrining a central bank's credibility into the public consciousness.

Latterly, of course, traditional central bank credibility has come under scrutiny both because of the failure to achieve published inflation targets (though unusually in the free-floating fiat currency era, it's been the failure to get inflation high enough) and for the nature of the nontraditional policy tools that have been employed, most notably QE and forward guidance.

However, in an environment of heightened regulatory intervention into many long-standing private-sector market practices, it's important to focus on other aspects of central bank credibility.  We operate in an environment of caprice when it comes to overseers' attitudes to market participants; some murky practices of dubious ethical legitimacy are permitted, seemingly because they are simply difficult to explain, whereas other, simpler activities  have become frowned upon by various members of the alphabet soup regulatory regime.  Moreover, regulatory credibility suffers substantially in cases such as blaming the Flash Crash on a relatively small futures trader living in his parents' house near Heathrow Airport.   Really?  It was him that told some robot to sell Accenture at a penny, and then handed said robot a Get Out of Jail Free card by wiping the trade?

In any event, when private sector participants are being targeted with what seems to be a fair amount of randomness, it is incumbent upon central banks to be whiter than white, paragons of virtue.   Not only because they are, after all, civil servants obliged to act in the public's best interest, but also because modern central banking revolves so heavily around communication.  In this, a number of central banks have been found wanting over the last few years:

* Philipp Hildebrand's wife made a tidy profit shorting the CHF just before the SNB imposed the EUR/CHF floor.  Really?   The SNB President's wife is allowed to punt instruments traded by her husband?

* Fed leaks.  Although the Federal Reserve is in the dock for a specific leak to MGA three years ago, anyone who's been around the block is aware of the myriad of consultancies who get messages on the QT from various members of the FOMC.  Macro Man can recall chatting with a punter friend at a well-known shop in early March 2009 and being told "we hear they're going to do QE."  Sure enough, that month, the Fed inaugurated its first proper QE program, and his friend (and the shop) made a killing.  Regulators have cracked down on this type of behaviour in the private sector, which is all the more reason for the Fed to keep their gobs shut.

* ECB meeting with the market just before policy announcements.   The FT has a story up about how a number of ECB members met with banks and buyside shops just before major policy announcements and during negotiations of to keep Greece afloat.  And of course, Benoit Coure was kind enough to tell a dinner full of punters how the ECB planned to execute QE the night before Draghi told everyone else in May.

* Mark Carney has wasted few opportunities to rail against pay in the banking sector, market practices, etc.   It's quite a turnaround for him, as he showed little interest in limiting bankers' pay when it came to negotiating his own compensation package, which at £874k per annum dwarfs not only his predecessor's remuneration, but that of every other major central bank chief in the world.  And what has the UK received for this expensive hypocrisy?   As many policy moves as an untrained chimpanzee could have executed over the same period, with more waffles than a Belgian bakery.

Listen, we get it: nobody's perfect.  But when the most charitable explanation for certain policymakers' behaviour is "stupid and naive", particularly if and as the behaviour provides certain advantages to select market participants.....well, that really shouldn't be allowed to fly given some of the things that private sector guys have been hung out to dry for.

Speaking of not being allowed to fly, if you're an SPX bear you could hardly ask for a better set-up to go short.   The index back towards all-time highs, earnings largely out of the way, macro data continuing to disappoint...and oh yeah, the RSI is at its highest level of the year.  The obvious stop is a percent and a half away; even if you're bullish, it would seem churlish not to book some profits here.

In the intermediate term, they may sink or swim based on an old-fashioned notion of central bank credibility; namely, whether the Fed can successfully extricate itself from the corner that it's been painted into.