Fed and BOE continue to blur the message on interest rates
It is time for much better communication from both central banks to clear up uncertainty as prevarication is resulting in market volatility
The body language says it all - the US and British central banks are posturing for higher rates. But it is hardly turning into a race for the tightening tape, more like a slow crawl towards the finish line to end six years of excessive monetary ease.
It is not so straightforward for the US Federal Reserve and the Bank of England to flick the switch back towards more "normal" monetary policy settings. It is a no-win game. Moving too soon to higher rates could flip the global economy back into recession, while delaying too long risks opening the door to increased inflation.
Both central banks have been hedging their bets for as long as possible to lever as much advantage as they can from rock-bottom rates to boost recovery. But the clock is ticking and critics warn prevarication may be doing more harm than good. It is time for better communication from both central banks to clear up the uncertainty.
US Federal Reserve chair Janet Yellen has been vacillating far too long about the right time to raise interest rates. It has not gone down well with the markets and has been a source of endless volatility in forward pricing for the US bond markets.
Earlier hints by Yellen this year implied the Fed might have raised rates by June, but now the focus has shifted to September, thanks to strengthening growth and employment.
But Yellen still seems to be dragging her feet over the negative economic picture abroad and very subdued US inflation tendencies at home.
Meanwhile, BOE governor Mark Carney has fared little better on solidifying British market bets for higher rates ahead. Despite very strong British gross domestic product numbers showing 2.8 per cent annualised growth in the second quarter, Carney is still only hinting a decision for higher rates might come into "sharper relief" by the end of the year.
Carney made similar remarks last year, which came to nothing. The British government's harsh fiscal austerity programme and an extremely low inflation rate at 0.1 per cent continue to compound the BOE's dilemma on when to pull the trigger for higher rates.
The lack of leadership from the Fed and the BOE is troubling the markets and making it very hard to gauge the likely path of interest rates over the next couple of years. Right now the front end of the US government yield curve is still only factoring in around 0.5 per cent of tightening over the next two years. For Britain it is an even smaller quotient.
This is not enough to satisfy monetary hawks who believe both banks need to quickly wean their economies off a toxic over-dependency on cheap money. In their view it is over-stimulating growth and future inflation risks and encouraging too much investor exuberance in financial markets, adding new dimensions of uncertainty to global instability.
Monetary moderates understandably question any early return to tighter monetary policy, citing recent volatility in global equity prices, turmoil in emerging markets and signs of slower growth in China as early manifestations of unease to the spectre of policy tightening.
In their view, the world economy is still in a state of post-traumatic shock after the global financial crisis and can ill-afford a further blow from higher rates or any major loss of global liquidity as quantitative easing is eventually reeled in.
While the Fed and the BOE found it easy to rush into super-easy monetary policy from 2008 onwards, back-tracking out of QE's monetary maze is proving much tougher. The odds are that it will need to be a very gradual process spread over years.
The Fed and BOE have two options. They can either be more candid with the markets and try to formulate rational expectations on what's to come policy-wise. Or the alternative is a more disorderly process where the markets risk over-shooting on where interest rates ought to be in the long run.
The foreign exchange markets are already doing this by default, with traders placing rising interest rate bets through the US dollar and the pound. Strong rallies in both currencies in the past few years are placing a considerable squeeze on the export sectors of both economies.
It is time for Yellen and Carney to play a much more assertive role in the rate setting process or else the Fed and BOE will end up well behind the curve with negative results.