Did Mario Draghi make a communication error?
What happened to our rally? Stocks in the U.S. and Europe initially rose, the euro weakened as Mario Draghi checked all the boxes that were expected:
1) Increased QE from 60 billion euros to 80 billion a month. Check.
2) Extended QE to at least March 2017. Check.
3) Expanded the assets being purchased to include corporate bonds. Check.
4) Lowered the deposit rate by 0.1 points to -0.4%. Check.
5) Announced a new Long-Term Refinancing Operation (LTRO), where a bank can borrow at the deposit rate (that is, borrow at a negative rate: the ECB pays the bank to lend!). Check.
Then—at the end of the conference—he seemed to casually mention that he doesn’t anticipate it will be necessary to reduce rates further.
The markets immediately turned around. The euro, in particular, did a full U-turn, going from 1.10 to 1.08, then back to 1.10. Stocks came off their highs. European bond yields, which were down, rose again.
Is this what Draghi wanted? Did he make this comment at the end to satisfy inflation hawks at the Bundesbank, who are surely not happy to see negative interest rates?
Central bank communication errors: a brief history.
They may or may not be “communication errors” but it’s likely Yellen and Bernanke both would have phrased their now-famous answers a bit differently.
March, 2014. Janet Yellen’s “six month” mistake. Yellen, in her very first press conference, was asked what the phrase “considerable time” meant in the Fed’s statement that “it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends.”
Yellen replied, “So, the language that we use in the statement is “considerable” period. So, I-you know, this is the kind of term-it’s hard to define. But, you know, it probably means something on the order of around six months or that type of thing.”
She never again put a timeline on any future Fed action.
June, 2013. Bernanke’s “taper tantrum.” Bernanke, in a press conference, noted that the economy was improving and then said, “we would expect probably to slow or moderate purchases some time later this year, and then through the middle of-through the early part of next year, and ending, in that scenario, somewhere in the middle of the year.”
Bond yields gapped up, stocks gapped down.