A packed passport appears to be a pre-requisite to running a modern central bank.
Less than a year since Mark Carney swapped the governorship of the Bank of Canada for that of the Bank of England, Nemat Shafik of the International Monetary Fund was yesterday named one of his deputies. Her hiring comes the same month the European Central Bank picked Canadian Julie Dickson to help oversee banks and as former Bank of Israel Governor Stanley Fischer and ex-U.S. Treasury Undersecretary for International Affairs Lael Brainard prepare to join the Federal Reserve.
The search for policy makers with global insight reflects how economies and financial markets are increasingly buffeted by events abroad, including banking turmoil, quantitative easing in the U.S., earthquakes in Japan, debt crises in Europe and geopolitics in Russia. They also face longer-term trends such as the growing power of emerging markets and the need to better regulate banks across borders.
“In an era of renewed globalization, securing monetary and financial stability requires more than a purely domestic focus,” Carney said in a lecture in London late yesterday. “Sustained imbalances across countries, intense capital-flow volatility and powerful disinflationary forces driven by the integration of the other half of humanity into the global economy will buffet our economy and financial sector for years to come.”
As part of an overhaul of how his central bank is run, Carney announced the creation of a new international directorate to monitor the world economy and coordinate with foreign counterparts. It will report to Shafik and fellow deputy Jon Cunliffe.
“Global financial connections are more important than ever to economic outcomes,” said Adam Posen, an American who sat on the BOE’s Monetary Policy Committee from 2009 to 2012 and is now president of the Peterson Institute for International Economics in Washington. “But as important is the benchmarking of policy and performance to global standards nowadays. So any central bank should be open to international-minded candidates as part of general openness.”
Shafik will join the U.K. central bank in August having served as a deputy managing director of the IMF since 2011, where she helped oversee bailout programs for Greece and Portugal and assisted the evolution of Arab economies. She previously worked at the World Bank and U.K. Department of International Development.
In a statement, Egyptian-born Shafik cited “continued international engagement” in reforming “financial markets for the post-crisis world” as a task she looked forward to. In her new post she’ll serve as the bank’s deputy official at Group of Seven meetings and represent the bank in gatherings of global policy makers.
The bank already has broad international experience. Carney, who holds an Irish as well as a Canadian passport, last year became the first person to run two G-7 central banks and still serves as the chairman of the Financial Stability Board, an international body created to rewrite the rules of finance after the 2008 financial crisis. He also once worked as Canada’s so-called Group-of-Eight sherpa, helping to prepare leaders’ summits.
Cunliffe, who joined the BOE last November as Carney’s deputy for financial stability, was previously the U.K. representative to the European Union and the U.K. government’s international sherpa. Donald Kohn, who once served as the Fed’s vice chairman, now sits on the BOE’s Financial Policy Committee.
Others are following the U.K.’s lead. Fischer ran Israel’s monetary policy from 2005 to last year, having previously served as the IMF’s No. 2 during the Asia turmoil of the 1990s and as the World Bank’s chief economist. At the U.S. Treasury from 2010 until November, Brainard was the U.S.’s point-person for Europe’s debt woes and efforts to prompt greater currency flexibility in China. She also once worked as President Bill Clinton’s G-8 sherpa.
It’s not just in monetary policy that global reach counts. Dickson, Canada’s top financial-industry regulator, will join the ECB’s Supervisory Board, which will assist the central bank in its role as a watchdog of the euro area’s lenders from November, the ECB said March 7.
Elsewhere, Raghuram Rajan was named the governor of the Reserve Bank of India last year having once run the IMF’s economics department. Graeme Wheeler worked at the World Bank before becoming governor of the Reserve Bank of New Zealand, which this month became the first central bank in the developed world in 2014 to raise interest rates. Stefan Gerlach, a Swede, has served as deputy governor of the Irish central bank since September 2011 and Polish central-bank chief Marek Belka also worked at the IMF.
So what explains the need for international insight? One reason may be the financial crisis of 2008 demonstrated how events in one economy can impact those abroad and how central banks sometimes need to unite in response.
The U.S. subprime crisis’s felling of Lehman Brothers Holdings Inc. led to coordinated interest-rate cuts and the establishing of currency swap lines to safeguard international access to dollars. It has since triggered a push to end the so-called too-big-to-fail bank threat and share more information across borders so large banks can fold in a more orderly way.
Later, central banks had to tune into Japan’s 2011 earthquake and tsunami, a debt turmoil which threatened the existence of the euro, and a recent roiling of emerging markets. Geopolitics also is returning to the fore as an issue for international policy makers amid the worst standoff between Russia and the West since the Cold War.
The next major tests for central banks may be that having united in stimulus they now show signs of diverging. At the same time, emerging markets are turning from drivers of global growth to drags. Both forces will probably have an effect on international markets and economies.
The U.S.’s decision to curb its monthly asset purchases already drew criticism from emerging market officials such as Rajan who have warned it could rob their economies of capital if not communicated properly. Tudor Investment Corp., the macro hedge-fund firm run by Paul Tudor Jones, told clients in January that global central-bank policies also will diverge this year for the first time since 2010.
“All central bankers should pay attention to the consequences their decisions have for the world economy,” Carney told Germany’s Handelsblatt in an interview published this month. “Furthermore, we showed in times of crisis that we can work well together -- for example with coordinated interest-rate cuts.”
More longer-term trends may be underway which will also shape the future of central banking. A study released last week by Morgan Stanley showed industrial economies are now more prone than ever to the economic gyrations of developing countries, which now account for about half of global gross domestic product, up from 37 percent in 1997-1998. Such economies are already slowing, with Morgan Stanley this week cutting its forecast for emerging-market economic growth this year to 4.7 percent from 5 percent.
Inflation also is increasingly driven by global factors such as cheap labor in developing nations, more open trade and the rise of multinational corporations, SLJ Macro Partners LLP, a London-based hedge fund, said in a January report. The result is that inflation rates are more correlated internationally even while GDP rates are as disparate as in the 1970s, said SLJ’s Stephen Jen and Fatih Yilmaz. Money-market futures show Carney’s BOE will probably be the first of the major central banks to raise rates.
“The world is much more interconnected now than it used to be and that’s now more obvious given the financial crisis,” said Rob Wood, chief U.K. economist at Berenberg Bank in London and a former Bank of England official. “Worldwide financial policy linkages are also more obvious and can clearly cause an enormous crisis.”