Central bankers are talking tough. They may be talking themselves into trouble

You can hear the talons scratching. Ben Bernanke, chairman of the Federal Reserve, first adopted a hawkish tone on June 3rd, lamenting the weak dollar's part in an “unwelcome” rise in inflation. Two days later Jean-Claude Trichet, president of the European Central Bank, stunned financial markets by declaring that the ECB may raise short-term rates at its next meeting in July. Then Mr Bernanke swooped once more. In a speech on June 9th he played down the news that America's jobless rate had risen in May by half a percentage point, to 5.5%. He argued that the risk of a nasty economic downturn had fallen and he promised that the Fed would “strongly resist” any rise in people's expectations of future inflation. As central banks from Canada and Britain to Vietnam and India have shown their claws, bond markets have been in turmoil. Investors have concluded that short-term interest rates are heading up, and fast.

About time too, you might say. With falling odds of a financial-market catastrophe and inflation uncomfortably high (and set to rise higher) the balance of risks is shifting. If central bankers have learnt anything over the past three decades, it is to make sure that people do not start to think long-term inflation rates will creep up. Words—including a certain anti-inflationary swagger—are valuable weapons in the modern central banker's arsenal. All that is true. But talk soon loses its power to convince unless people believe it will be backed up with action. The problem today is that the distance between talk and action differs dramatically between the Fed and the ECB.

Birds of a feather

Granted, the two central banks survey different economic and monetary landscapes. America is close to recession and real short-term interest rates are negative. The euro zone has a stronger economy but much tighter monetary conditions (the ECB has kept short-term rates unchanged at 4% throughout the credit crisis). Both central banks face a similar problem: how to deal with inflation that is being pushed up by commodity prices, particularly for oil. Both are determined to avoid the mistakes of the 1970s, when loose monetary policy transmitted the oil shock into the economy, setting off a spiral of rising wages and prices. But the central banks disagree as to the amount of insurance they need to stop that happening.

The European Central Bank reckons that a slower economy will not be enough to stop prices rising. Although output has been surprisingly resilient so far, most forecasters expect a slowdown in the second half of the year. But with unemployment low and headline inflation high, the ECB—with its single mission to keep inflation at or below 2%—is worried about knock-on effects. Even though oil is the main culprit and long-term inflation expectations have not moved much, the ECB's desire to pre-empt persistent inflation points clearly to higher interest rates in July.

The Fed seems much less likely to raise rates. Despite some warning signs—on one measure, for instance, consumers' expectations for long-term inflation are at a 12-year high—wage growth is slowing, and average pay cheques are falling sharply in real terms. There is no whisper of a wage-price spiral. What is more, house prices are still tumbling and the financial hangover from the credit crunch is not over yet. The risks to growth, as Mr Bernanke admits, are on the “downside”. And, for better or worse, the Fed is charged with caring about both full employment and stable prices. Add in the politics of raising interest rates just before a presidential election, and the odds are that the Fed's talk remains just that.

A wide transatlantic gap between rhetoric and action is unfortunate—and

bodes ill for the Fed's credibility. After the Fed's rapid, pre-emptive loosening to a federal funds rate of 2%, financial markets will be watching to see whether it is correspondingly prepared to tighten again. Mr Bernanke has made his job all the harder by adding the dollar to the mix. If the ECB tightens and the Fed does not, the dollar is likely to weaken against the euro—exactly the opposite of what Mr. Bernanke last week implied he wished to happen. For the time being, the dollar is up and oil prices down. The hawkish rhetoric seems to be working a treat. But unlike real talons, mere words will not leave a lasting mark.

Economist

Assignments

I. Suggest the Russian for the following:

1. to adopt a hawkish tone

2. a nasty economic downturn

3. to be in turmoil

4. economic and monetary landscape

5. loose (tight) monetary policy

6. the output has been resilient

7. knock-off effects

8. credit crunch

9. the gap between rhetoric and action

10.to bode ill

 

II. Find the English for the following:

1. преуменьшать, умалять важность ч-л

2. уровень безработицы

3. инфляционные ожидания

4. процентные ставки повышаются (2)

5. подкреплять слово делом

6. в течение всего кризиса

7. хроническая инфляция

8. цены резко снижаются

9. ставка по федеральным фондам

 

III. Explain or paraphrase the following:

1. You can hear the talons scratching

2. Real interest rates are negative

3. …loose monetary policy transmitted the oil shock into the economy

4. headline inflation

5. …oil is the main culprit

6. …there is no whisper of a wage-price spiral

7. financial hangover

8. to work a treat

 

IV. Examine the subtitle “Birds of a feather”. Reconstruct the original proverb and give

Its Russian equivalent

V. Sum up the article “Hawk alert” in no more than 70 – 75 words

VI. Read the article “Does the new dollar policy make sense?” and answer the questions

Does the new dollar policy make sense?

For several years two rules have governed America’s dollar policy. The first was that only the treasury secretary talked at length about the greenback. The second was that he repeated a vacuous mantra about a strong dollar being in America’s interests, even as everyone knew policy-makers quietly welcomed its slide.

No longer. American officials are worried about the dollar. On June 2^nd Hank Paulsen, the treasury secretary, gave a forceful rendition of the strong dollar rhetoric in Abu Dhabi. And on June 3^rd Ben Bernanke, chairman of the federal Reserve, dwelt on the currency in a speech to a European audience. He left no doubt that American officials did not want further dollar weakness. The greenback’s slide, he said, had contributed to an “unwelcome” rise in inflation. And he made clear that, together with the Treasury, the Fed was “carefully” monitoring currency markets. “We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations.”

By the standards of most officials’ currency commentary, this was strong stuff, and the dollar duly strengthened – to $1.54 against the euro by June 4^th. But bigger questions loom. What is behind America’s new dollar policy and what practical consequences will it have?

Inflation worries are a prime motivation. According to the latest figures from the University of Michigan, consumers’ long-term inflation expectations have risen to 3.4%, a 13 –year high. Hence the central bankers must appear vigilant, which means they cannot afford to ignore the impact of the dollar

The question is whether the Fed will back its dollar rhetoric with higher interest rates. For the time being, the signal is about the end of rate cuts rather than imminent rises. America’s new dollar policy may be less absurd than its old one, but it is still a bit of a muddle.

 

Condensed from Economist

Questions:

1. What is America’s new dollar policy and how do American officials account for the

change?

2. What actions is the Fed expected to take to back up its talk of a stronger dollar?

3. Does America’s central bank walk the talk? Why does the author characterize the new dollar

policy as being “a bit of a muddle?”

 

VII. Render the article below in English making use of the words suggested:

To seal fate; regular meeting; to go hot and cold; to reverse one’s policy; to rebuff; to be concerned at smth; sustained growth; runaway inflation; to sell off; economic slowdown; to aggravate the situation; to be sitting pretty.