Lesson for Yellen: Trigger-Happy Central Bankers Reversed Course

How Much Does Janet Yellen Care About the Selloff?

Call it hiker’s remorse.

All 15 central banks of the 34 countries in the Organization for Economic Cooperation and Development that raised interest rates since the 2008 financial crisis ended up cutting again. New Zealand even reversed course twice.

“It’s certainly one reason to think central banks will remain cautious on the rate-tightening front,” said Marcus Wright, an Edinburgh-based economist at the Royal Bank of Scotland Group Plc who highlighted the moves. “The case for raising rates will have to be very strong indeed.”

With global equity and commodity markets in turmoil and fears of deflation re-emerging, the about-faces mean rates could end up staying lower for longer to ensure stronger economic and consumer-price growth are guaranteed, he said.

Few policy makers have publicly conceded mistakes, yet the speed at which stances changed in recent years testifies to how wary central banks must be when betting inflation has returned as a threat. It also shows just how hard it is to pull back easy money without damping demand.

Although it’s been suggested that raising rates from near zero replenishes the toolkit for fighting future crises, doing so prematurely deals economies a blow and saps the credibility of authorities among investors. In Sweden, for example, the benchmark rate was raised in 2010 only for inflation to plunge, forcing the Riksbank to start cutting anew and push its key rate into negative territory.

Turkey’s Reversal

In the case of Turkey, the reversal from increase to reduction took just four months last year, while the euro zone and Denmark turned tail in seven months in 2011. The Bank of Canada held out for 55 months between tightening policy in 2010 and then easing it.

Others to flip from hawkish to dovish in 25 months or less include Australia, Iceland and Israel. Further back, the Federal Reserve in the 1930s and Bank of Japan in 2000 both tightened policy only to change direction as their economies buckled.

Such episodes will influence Fed Chair Janet Yellen and Bank of England Governor Mark Carney as they consider how soon to raise interest rates. That debate is already being cooled by the global selloff in stocks.

Former U.S. Treasury Secretary Lawrence Summers took to Twitter Monday to warn raising rates in the U.S. as soon as September would threaten the Fed’s “major objectives -- price stability, full employment and financial stability.” Nobel laureate Paul Krugman used his New York Times blog to flag a “big mistake” if the Fed raises and highlighted the history.

“Think Japan 2000; think ECB 2011; think Sweden,” Krugman wrote. “Don’t do it.”

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