“Say what you mean…and mean what you say”.Two Little Words
So suddenly we were all looking at charts of the last tightening cycle which began in November 2005 to discover just how predictive this phrase really was. Sure enough, whenever Trichet used the phrase “strong vigilance” following an ECB meeting, a rate rise invariably followed after the next meeting or two.
It has become known as the “Trichet traffic lights” system. Phrases like “Monitor Closely” were red…..nothing expected just yet. When it went to “monitor very closely” or “exercise vigilance” then we were on amber…rates were moving and probably in the near future. But if the words “Strong vigilance” were uttered; the light’s at green. Rates are going up!
The ECB is far from alone in using such linguistic telegraphic systems – the US Federal Reserve also does it. The Fed’s current phrase is that economic conditions warrant “exceptionally low levels” of interest rates “for an extended period.” Those words have been used after every scheduled Fed meeting for the past year. Religiously, the words are trotted out in the statement and the minutes. So long as those words are there, all is good and safe in low-rates land. But be warned – the first time those words are missing everyone will be on notice that things are about to change.
There is one phrase that has been overused and abused and is now just about ignored. US Treasury secretaries always say that a “strong dollar” is in the US’ best interest and, by implication for the rest of the world too. Time and again they trot out this bromide and no-one believes it. Even the former fed Chairman Alan Greenspan described it as “boring…dull…repetitive…non intellectual.” And yet apparently very effective at getting people to ignore what was really happening. For instance from 2006 to 2008, then US Treasury Secretary Hank Paulson uttered the “strong dollar” mantra frequently while the currency sank 20% against the euro. It was all rhetoric.
To the outside world this might seem like a silly game for grown men and women to play. Unfortunately, coming out and saying what you mean is not possible because the relationship between central bankers and the markets is delicate. When rates go up and down, investors change their strategies. The Central Bank knows huge sums of money start moving if they merely hint at shifts in monetary policy. Currencies, especially, are affected. On Thursday the euro initially gained nearly 1% after the ECB’s “strong vigilance” green light.
In the end, while the central bankers don’t want to reveal their hand nor do they want to take the market by surprise with sudden changes in policy which can create extreme volatility. Telegraphing intentions in advance allows everyone to prepare for what they know is on the way… if not the exact timing. Like every good magician, you don’t want to do all your show and tell at once. Where the ECB is concerned, as investors, we too now must be vigilante; we have been warned.
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Richard Quest is a CNN correspondent based in London, host of the weekday one-hour program “Quest Means Business”. For program highlights and more, go to www.cnn.com/qmb
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