European Central Bank Mario Draghi, in his unusually brief post meeting press conference today, delightfully lambasted the “clueless” reporters that have been running with “uninformed” (and vague) reports of a potential imminent ECB bond purchase program taper. Of course that is not true.
*** But for all that, he absolutely did not rule out the December meeting option that we expect, namely, that the Governing Council may choose to extend QE at something other than – meaning less than – the current 80 billion Euro/month pace (see SGH 10/5/16, “ECB: A Major Inflection Point”) when they weigh what to do with the asset purchase program beyond its currently slated March 2017 expiration. ***
The Question that was not Asked
Indeed, Draghi referred a few times to the staff committee work currently underway to determine the various options and parameters for QE post-March that would alleviate some of the constraints in implementing its Asset Purchase Program, stressing that the ultimate decision on QE would not be based on the Committee’s technical recommendation, but made by the Governing Council with the economic forecast in mind.
That is a subtle but clear poker “tell” that one of the options the ECB will be presented with to address the scarcity issue will be to simply buy slightly fewer bonds; Draghi appears to believe the source of the wire service taper stories may have been from there.
But on that note, the key monetary policy question that was NOT asked of Draghi was the following:
Does “preserving a very substantial degree of monetary accommodation” beyond March mean maintaining the same monetary policy stimulus, or does it factor financial conditions more broadly? In other words, does QE need to do all/the same amount of the lifting/work after March to KEEP rates at these “extremely accommodative” levels… when the policy objective is no longer to drive rates LOWER, especially in light of the scarcity of bonds and how the current pace of purchases may keep driving rates lower and lower?
We are certain the ECB has not made that final determination, nor had that formal discussion, yet. But what exactly does “preserving” entail?
THAT is the question they are looking to answer in determining whether the ECB continues its purchases at 80 billion Euros/month beyond March 2017, or at some lower rate, as we expect they will (see SGH 10/18/16, “ECB: Bridge to a Major December Meeting” as well as SGH 10/5/16, “ECB: A Major Inflection Point”).
“Tapering versus Adjusting”
As a point of clarification to clients, we have fielded numerous questions on whether we expect the ECB will “adjust” its purchases downwards, or “taper,” in the “strict” definition of the word, beyond March, which confused us at first.
We understand the clear distinction between a potential step-drop in purchases from, say, 80 to 60 billion Euros per month versus a glide path of say dropping 5-10 billion per meeting or month, or perhaps introducing some flexibility into the program that would allow for that.
Frankly at this point we have no clear expectation for what the adjustment will be – and we would suspect, neither does the ECB at present. But we do expect the program to be adjusted downwards.
What we failed to appreciate was the loaded nature of the term “taper,” as opposed to a step-down or deceleration, in implying a relatively rapid glide path to zero purchases…i.e. full exit from the program.
We would hesitate to predict whether or not the Eurozone economy or ECB will be ready for quite so aggressive an adjustment by March. But less is still less, and as Draghi did pointedly remind markets in today’s presser, “extraordinary policy support won’t exist forever.”