2017/07/20 Commentary: ‘Normalization Bias’ NOT Back Redux

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Commentary: Thursday, July 20, 2017

‘Normalization Bias’ NOT Back Redux

There’s a question we would like to pose that relates to the observations out of last Wednesday evening’s post-Yellen testimony Commentary: ‘Normalization Bias’ NOT Back!! post that the central banks are not as hawkish as some folks had inferred from their previous comments. This was obvious in Fed Chair Yellen feeling federal funds rate increases might be close to the end. This was a surprise to some who had felt the ‘normalization’ talk of the previous several weeks from key central banks signaled the dawn of a less accommodative central bank era. That actually went back to several weeks ago Tuesday when BoE head Carney shifted to a more hawkish anti-inflation stance, and especially ECB President Draghi speaking effusively about how much he liked the real improvement in the Euro-zone economy. The latter was interpreted as a hawkish sign.

All of that came in the wake of a US FOMC meeting and press conference where the economic and future federal funds rate projections were very strong. As recently as that mid-June meeting the Fed was projecting another rate hike in 2017 and three more in 2018 only a month before Janet Yellen indicated they might mostly be finished!! Yet that fit right in with a return to serial weak US data, which made the Fed perspective reversal less of a surprise than a relief for us. And that was reinforced this morning by Signore Draghi.

The inferred less accommodative ECB position was in the wake of his Tuesday, June 27^th speech at the ECB Forum in Sinha, Portugal where he pointed up the sustained Euro-zone economy improvement. And after a still very accommodative opening statement at this morning’s post-rate decision ECB press conference, many of the press referred to this as Draghi’s ‘Sinha’ speech. They kept trying to draw him on misplaced inferences that the speech signaled a shift in ECB policy. Yet a very happy and relaxed Draghi (Merry Mario) dismissed all such implications, and reconfirmed the plan to continue full ECB stimulus until the end of 2017 or beyond if necessary. Don’t take our word for it… click out to the full ECB transcript and link to the video.      

That gets us to the question: When central bankers get caught up in temporary bouts of ‘normalization bias’, are they just ill, or are they ‘carriers’? That relates to a financial press that thrives on reporting change, and sometimes likes to imagine it where none is actually occurring. In a conversation with Yra Harris of Notes From Underground blog we decided they are just trying to gain readership…

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