Analysis: Short on tools, central banks left with words
By Pedro da Costa
WASHINGTON (Reuters) - Some of the world's most prominent central bankers may have to hope the pen is as mighty as the sword.
With the Federal Reserve, the European Central Bank and other authorities in industrialized countries already stretching the limits of monetary policy, pressure has risen for them not go any further, and even to begin pulling back.
Top officials have had to rely increasingly on speeches - not always successfully - to convey to financial markets how they intend to manage their economies.
"A new policy regime characterized by jawboning is now here," said Eric Green, economist at TD Securities. "Policy is more constrained and more accommodation increasingly problematic in scope and complexity."
As U.S. Treasury yields began to rise in late March on signs of an economic recovery, Fed Chairman Ben Bernanke gave a speech that focused on the weakness of the labor market. Stocks and bond markets rallied on hopes that this meant he was gearing up for a third round of quantitative easing or QE3.
The following week, the release of minutes from the Fed's March meeting painted a much more hawkish picture, with a dwindling number of voting members on the Federal Open Market Committee - just two of 10 - actively considering more stimulus.
The news prompted Vincent Reinhart, a former Fed staffer now at Morgan Stanley, to sharply revise down his forecast for the prospects of QE3 to just 1/3 from 2/3.
Then, just a few days later, data showed the pace of job creation halved in March from previous months, reviving some of the bets on more Fed action. However, economists said policy-makers would not read too much into one's month data. Continued...