Posted by genieSABRE on Aug 11, 2011
Bernanke apes Carney

Bernanke apes Carney

Bernanke Borrows From Carney’s Stimulus Playbook With Interest-Rate Pledge

Federal Reserve Chairman Ben S. Bernanke has taken a page from Bank of Canada Governor Mark Carney’s stimulus playbook by choosing to specify a date for his pledge to keep borrowing costs low.

The Fed yesterday said it would hold its benchmark interest rate near zero for at least through mid 2013, replacing an earlier promise to keep it there for “an extended period.” Two years ago, Carney made a similar promise to keep rates low for 15 months, conditional on the inflation outlook.

Carney’s commitment was aimed at adding stimulus to the economy at a time when short-term interest rates were already close to zero, the Bank of Canada said. The pledge influences longer-term borrowing costs because investors know that policy rates won’t rise during the time frame specified by the central bank.

“When we look at past comments by Fed officials, and I think Bernanke included, there has been specific reference and genuine curiosity with what the Bank of Canada did, and the success of that move,” said Rudy Narvas, senior economist with Societe Generale SA in New York.

Bernanke cited the Canadian example in a speech last August, when he listed policy options for the Fed. Fed staff members have consulted colleagues at the Bank of Canada about their experience with the conditional commitment, according to people familiar with the matter who didn’t want to be identified because the discussions were confidential.

Sheryl King, head of Canada economics at Bank of America Merrill Lynch, calls the strategy an “open-mouth” policy, in a play on so-called open-market operations, or the sales and purchases of securities used by central banks to influence interest rates.

Additional Layer

It’s “enhanced communication with the markets,” King said. “It’s one additional layer they are putting on top of communications they have.”

In April 2009, Carney cut his policy interest rate to 0.25 percent and said it would stay there for 15 months as long as the inflation outlook didn’t change.

“With monetary policy now operating at the effective lower bound for the overnight policy rate, it is appropriate to provide more explicit guidance than is usual regarding its future path so as to influence rates at longer maturities,” the Bank of Canada said at the time.

The bank also spelled out how it might conduct quantitative and “credit easing” if those policies were needed, though it never used them. So-called quantitative easing was a tactic employed by the Fed, which bought a total $2.3 trillion in securities in two rounds to lower long-term borrowing costs and stimulate the economy.

Historical Relationship

A 2010 Bank of Canada discussion paper said the bank’s “conditional commitment likely has produced a persistent effect in lowering Canadian interest rates relative to what their historical relationship with inflation and unemployment rates would imply.”

The difference in yields between Canadian and U.S. five- year government bonds averaged 17 basis points between April 21, 2009, when the policy was first announced, and March 3, 2010, when Carney first signaled he wouldn’t extend the pledge. The spread has since averaged 62 basis points, according to data compiled by Bloomberg.

Inflation, which was at an annual rate of 0.4 percent when Carney made his commitment, accelerated to a 1.8 percent pace one year later — close to the central bank’s 2 percent goal. Canada’s jobless rate was slower to recover, falling to 8.1 percent when the commitment ended from 8.2 percent in April 2009.

Dual Mandate

The Fed’s dual mandate — to keep inflation low and stable and aim for full employment — may make using the commitment more difficult in the U.S. than it was for the Bank of Canada, which focuses only on inflation. Canada’s commitment was “conditional” on the inflation outlook, and Carney lifted it before the scheduled end amid signs growth and inflation were faster than they had forecast.

“Although this approach seemed to work well in Canada, committing to keep the policy rate fixed for a specific period carries the risk that market participants may not fully appreciate that any such commitment must ultimately be conditional on how the economy evolves,” Bernanke said in his Aug. 27, 2010 speech in Jackson Hole, Wyoming.

In that speech, Bernanke signaled that the Fed might embark on a second round of large-scale asset purchases, which was ultimately announced in November.

While Carney repeatedly stressed the conditional nature of his commitment to low rates, the Fed was less explicit in yesterday’s statement.

To contact the reporters on this story:

Theophilos Argitis in Ottawa at,

Ilan Kolet in Ottawa at

ALSO READ … Interest rates may be set to fall ! (click here)


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