McCrann: Central bankers should leave interest rate forecasting to the economists

Jerome Powell has shown why central bankers should get out of the business of interest rate forecasting, and focus more on ‘doing’ and less on ‘saying’.

Federal Reserve chair Jerome Powell announces that interest rates will remain unchanged. Picture: Getty Images

Central bankers really should go back to a 1990s future and get out of the interest rate forecasting business.

Now, the standout example that would spring to Australian minds – somewhat unfairly – would be our own former Reserve Bank governor Philip “no rate rises until ’24” Lowe. Unfairly, because the “promise” had to be understood in the total context of the policies he had put in place in the dark days of Covid.

But only somewhat unfair, because it didn’t have to be so emphatic, and he really should have started walking it back towards the end of 2021.

Fast forward, and just six weeks ago, we had Fed head Jerome Powell doing a 180 from having talked possible rate hikes in December to talking possible rate cuts.

This was backed up by “forecasts” from the Fed members of three cuts before the end of 2024. And yet more cuts in 2025.

Now, just six weeks later, early morning Thursday our time, Powell has “re-pivoted” back 90 degrees.

No, he hasn’t gone back to talking possible rate hikes, but to a wishy-washy, really quite embarrassingly pathetic, sort of rate neutrality.

He doesn’t expect rate cuts to be “appropriate” anytime soon. But he also thinks it “unlikely” that the next US rate change will be a hike. Hence, a sort-of no-change neutrality.

Our RBA governor Michele Bullock did it much cleaner and more sensibly in her rate-holding statement mid-March: “The board is not ruling anything in or out.”

My respectful advice to her would be to keep doing this, when the board holds the rate unchanged again next Tuesday. She should just leave it to the experts to make idiots of themselves with their predictions.

It used to be the joke that economists had the great forecasting record of predicting six or seven of the past two recessions.

Since the 1990s the expert predictions have switched overwhelmingly to the RBA’s and the Fed’s official interest rate.

Remember the race to predict how many rate cuts we were getting this year?

And when the first one would come?

Indeed, did you relish the February rate cut, predicted by at least one expert?

No? Neither did I.

Now while it’s the job of the economentariat to, so to speak, make gooses of themselves, it’s not the RBA’s.

The RBA’s forecasts/promises have very real-world consequences.

Yes, we live in an age that demands a sort of skin-deep fake transparency. But the RBA should go back to the ethic that drove it through the 1990s and 2000s of “doing” not “saying”.

It’s better for a central bank to surprise rather than disappoint with a false (seeming) promise.

As for the Fed and Powell, they stepped back from cutting the rate, but it passed largely unnoticed by the economentariat that they couldn’t resist throwing Wall St an easing bone.

The Fed will cut back on its unwinding of all the QE money printing it had done both before Covid and then in the Covid panic.

So, it’s still de-QEing, but at a slower pace – slightly easing pressure on US and indeed global bond yields.

Originally published as McCrann: Central bankers should leave interest rate forecasting to the economists