“Hiking alone is not recommended” goes the warning to walkers in Wyoming’s Grand Teton National Park.
Central bankers should perhaps heed the same advice when it comes to interest rates as they fly this week to the Tetons and their annual symposium on monetary policy in Jackson Hole. Currency bulls rather than grizzly bears are the reason there is safety in numbers for them.
The point is highlighted in recent research by Joachim Fels and Manoj Pradhan, economists at Morgan Stanley in London, who use a cycling rather than walking analogy to make it.
Reviving a 2009 analysis, they note cyclists prefer not to ride solo because of wind drag and to instead stick to a group - - or peloton -- to reduce headwinds by as much as 40 percent.
For those who try to go it alone in monetary policy, the work can be harder too. Raising rates before counterparts or signaling plans to do so often trigger higher exchange rates, which sap demand in their economies and often force them back into the pack.
“In cycling, the peloton is usually led and controlled by the strongest and largest teams,” Fels said in a report yesterday, citing a longer study he and Pradhan released on July 30. “It’s the same with the global monetary peloton where the easy policy stance of the Group of Three central banks sets the pace for the entire group.”
For Tour de France winner Vincenzo Nibali, read Federal Reserve Chair Janet Yellen.
The message from her and fellow central banking superstars is loose monetary policy still has a while to run. Yellen continues to caution that labor markets are slack enough to merit low interest rates, while European Central Bank President Mario Draghi and Bank of Japan Governor Haruhiko Kuroda may even deploy more stimulus before the end of the year to battle low inflation.
Yellen and Draghi will both address the Federal Reserve Bank of Kansas City’s conference in Jackson Hole on August 22.
Their behavior makes it tougher for others to take the initiative. A case in point: Bank of England Governor Mark Carney. After warning in June that investors may not appreciate the risk of higher rates, he said last week the U.K. won’t rush to act amid overseas threats of expansion and the weakness of wages.
Economists at Citigroup Inc. and Berenberg Bank were among those to revise their forecasts to show the U.K. central bank raising rates in the first quarter of 2015 rather than the last few months of this year. The pound responded by falling for a sixth week against the dollar, its longest run in four years.
Carney isn’t alone. New Zealand also has tightened policy more slowly than its domestic economy would suggest, according to Morgan Stanley. The central banks of Sweden, South Korea, Mexico and Israel have all cut their benchmarks lately, while Canada and Australia have turned more dovish. Most noted currency strength or global economic conditions in explaining their decisions.
Those that have acted recently -- notably Ukraine and Russia or New Zealand in the first part of the year -- did so because of clear local pressures.
When the pack picks up the speed away from stimulus will therefore depend on Yellen, Draghi and Kuroda. If economic growth or inflation accelerates more than anticipated they may even push ahead faster, creating other challenges for their fellow riders, according to Fels and Pradhan.
“At the moment this looks possible only in the U.S.,” they said. “All eyes remain firmly on whether the Fed will give up the yellow jersey or still dominate the global central bank peloton.”