As 2012 comes to a close, it is obvious that this has been a year of coordinated monetary stimulus, but what will be the hallmark of monetary policy in 2013? Undoubtedly we will see continued stimulus from many central banks throughout 2013, but it is crucial to point out that the world's five most important central banks are all undergoing changes and challenges to their transparency policies. Surely these changes to transparency policies at the Federal Reserve, Bank of England, Bank of Japan, European Central Bank and the People's Bank of China are largely a result of having no place to go with rate policies, but that does not diminish the potential impact of these transparency measures. If anything, investors should be preparing for the effect of these new transparency strategies as we move into the New Year.
The most prominent change in central bank transparency for American investors is the Fed's new forward guidance strategy. Having abandoned its date-certain strategy, the Fed has decided to declare that it will not change interest rates as long as unemployment remains above 6.5% and inflation remains below 2.5%. Although the committee attempted to make it clear that it will also be considering other data, this new strategy will have a significant effect. In particular, long-run employment projections suggest that the U.S. will not get below 6.5% unemployment until at least mid-2014. So, we should not expect a rate change until at least that time. However, the much quieter aspect of this policy is that it implies that the Fed is softening on its year-old inflation targeting policy to tolerate an upper bound 0.5% higher than the official 2% target. This means that investors now have a concrete admission from the Fed that it is tolerating (and perhaps targeting) higher inflation.
The Bank of England's shift in transparency is likely to be a product of its leadership change. Specifically, incoming BOE Governor Mark Carney has indicated that he might direct the bank toward a similar forward guidance policy to that of the Fed. This would set a much firmer time horizon than the BOE has ever provided and it suggests that Carney might use transparency and increased policy certainty to instill faith in the British economy.
Just as the BOE might begin departing from its long-held inflation target toward a more specific forward guidance, speculation is mounting that the Bank of Japan will adopt a U.K.-style inflation target. This would increase BOJ policy transparency and as the recent election and growing political pressure forces the BOJ toward a higher inflation target, investors should expect the BOJ to make every attempt to drive down the value of Yen in 2013.
As 2012 comes to a close, several commentators have begun pointing out that the secrecy surrounding the European Central Bank might be depressing growth. This is almost undoubtedly true. The ECB has muddled through repeated rescues and provided no concrete timeline for a resolution to the European debt crisis, but it has also been beyond its power to provide a credible timeline. However, if the ECB can successfully instill a fiscal compact in 2013, then the odds of greater ECB policy transparency and long-term planning increase dramatically. Such transparency will increase ECB credibility in markets and could be a significant step to stabilizing the eurozone.
The most opaque of the five major central banks in the world is definitely the People's Bank of China. With the leadership change over the last few months, new party leaders have signaled a greater tolerance for government transparency in China, but it is unlikely to be a paramount goal for the PBOC in 2013. More importantly for market actors, if the PBOC continues to target outcome variables such as growth, it will remain very difficult to understand what policy steps it is taking to influence the Chinese and global economy. At this point, the biggest hope for Chinese policy transparency comes from persistent external pressure for normalization of currency policy; if the PBOC allows the Yuan to rise to market value, it will behave like any other currency and it will be much easier for investors to understand trade and currency relations tied to China.
Ultimately, 2013 may very well be the year of central bank transparency. Markets tend to like this transparency and the financial media love it since there is more information than ever to over-analyze. This is a key point about transparency. While the market tends to favor it since information provides stability to investors, as central banks become more transparent and release more information, there are, and will continue to be, diminished returns on that chatter. Essentially, as central banks become more transparent in the coming year, market actors should expect each communication to provide less new or relevant information, so investors should act accordingly without an expectation of big post-communication market swings.