Q1 2018 Special Report Central Banks Your 2018 Outlook Here’s what’s ahead for the world’s biggest central banks. Plus, forecasts of rates and economies p 12 Bastion of Technocracy China, China, China It’s Scorecard Time Here, Lie on This Couch Welcome to the elite Let’s talk about what Who’s the world’s best Lacking purpose? Feeling private club of the world’s happens the year after the central bank forecaster? impotent? Enter central central bankers p28 PBOC’s big year p26 (And who’s the worst?) p5 bank psychiatry p2 Contents Senior Executive Editor for BLOOMBERG Bloomberg Economics MARKETS SPECIAL REPORT Stephanie Flanders Q1 2018 Executive Editor, Bloomberg Economics Simon Kennedy Chief Economist, Bloomberg Economics Michael McDonough Editor, Bloomberg Markets Joel Weber Special Reports Editor Siobhan Wagner Art Directors Lee H. Wilson, Josef Reyes Graphics Editor Mark Glassman Photo Editor 2 Donna Cohen Your Psychiatrist Will See You Bloomberg Markets utilizes the resources of Bloomberg News, Bloomberg Television, Now, Mr. Central Banker Bloomberg Businessweek, Bloomberg A visit to Dr. Honoris Causa reveals all Intelligence, and Bloomberg LP. Editor-in-Chief 5 John Micklethwait Forecasting, Reviewed Deputy Editor-in-Chief Reto Gregori Which central bank is the Economics Managing Editors most accurate? Brendan Murray, Craig Stirling, Malcolm Scott, and Vivianne 8 26 Rodrigues Senior Economists What to Talk About Holding In a Sneeze Carl Riccadonna, Jamie Murray, When You Talk About Brexit China is trying to ward off the sniffles and Tom Orlik New flows functionality as it enters 2018. Its plan to curtail Creative Director Robert Vargas lets you see which U.K. stocks its massive buildup of credit will have Photo Director foreigners are holding ramifications for the world economy Clinton Cargill Managing Editor 11 28 Kristin Powers Copy Chief What Does a New Fed Head The Little-Known Club at the Lourdes Valeriano Mean for Rate Increases? Heart of the Financial World Copy Editors The Fed Spectrometer allows you The Bank for International Brennen Wysong, Mark Leydorf to monitor the history and tone of public Settlements remains a bastion of Production Associate comments from individual members global technocracy—even in an age of Loly Chan of the Federal Open Market Committee increasing transparency and growing Head of U.S. Financial Sales disillusionment with elites Michael Dukmejian / 12 212 617-2653 30 Head of EMEA Sales 2018 Central Bank Outlook Viktoria Degtar / 44 20 3525-4026 Here’s what you should know It’s Trump’s Fed Now Head of APAC Sales about the world’s most important The president’s remaking of the Mark Froude / 65 6499-2818 central banks Board of Governors is stripping it of Production/Operations decades of institutional experience Debra Foley, Dan Leach, Carol Nelson, Steven DiSalvo, 24 Bernie Schraml A Plan Starts to Come Together 32 Global Chief Commercial Officer Andrew Benett / 212 617-8225 Not since before the creation of Cheat Sheet Global Chief Revenue Officer Europe’s monetary union have growth Consider these functions Keith A. Grossman / 212 617-3192 rates for northern and southern on the Bloomberg terminal your members been as close as they are now central bank toolkit [email protected] Forward Guidance Your Psychiatrist Will See You Now, Mr. Central Banker By RICH MILLER ILLUSTRATION BY PATRICK LEGER 2 BLOOMBERG MARKETS SPECIAL REPORT GLOBAL CENTRAL BANK (GCB) checks there are the pointy heads who want me DHC: Why do you insist on taking the hallway for pesky reporters, sees to adopt a price­level target—or even everything on yourself? Isn’t there some­ none, and slips into the finely furnished worse, a nominal GDP target. Yeah, just body who could help you? office of Dr. Honoris Causa (DHC), try explaining that to Representative Max­ GCB: Who? My brother, FSB [Fiscal noted psychiatrist to the troubled rich ine Waters. Sometimes, I just want to Stimulus Brigade]? He’s too busy getting and famous. chuck it all and go back to academia, where his jollies cutting taxes. Great timing, that. GCB: Thanks for seeing me, Doctor. everything is so P.C. Look, I’m not asking for much. All I want is Frankly, I’m not sure why I’m here. I should DHC: Politically correct? for things to get back to normal, to get back be jumping for joy. For the first time in years, GCB: No, no. Phillips curve. You know, to what they used to be before Larry Sum­ everything is in sync. Growth is up every­ you push unemployment down, wages start mers started yapping about secular stag­ where. But I can’t stop feeling anxious. Ever to rise, and—voila!—inflation goes up. If only nation. Sometimes I wish he’d just shut up. since I was a little boy growing up in Chicago, it was so easy. DHC: Well, somebody loves you. The it was drummed into me that the one thing DHC: Is that what’s really bothering stock market is exuberant. I should know. I was really good for was controlling inflation. you? I just sold some Facebook shares and It’s always and everywhere a monetary phe­ GCB: (Breaks down and starts cry- bought my third Porsche. nomenon, as Uncle Milton never tired of ing.) Nobody loves me anymore! I used to GCB: Yeah, yeah, you’re all alpha telling me. But no matter what I do, I just can’t be the maestro. They’d ask my opinion on dogs as long as I’m pouring in liquidity. Wait seem to get it up. I’ve even gone a bit uncon­ everything from oil drilling to capital gains. until you see what happens when I start ventional and bought buckets of bonds. But Now the Republicans hate me. The Ger­ taking it away. all that’s done is end up tying my balance mans hate me. Even the Japanese, who DHC: Wait a minute. You’re not think­ sheet in knots and leaving my hair with more are willing to put up with almost anything, ing of doing that, are you? I’ve got my eye shades of gray. Inflation is still soft. got up in arms when interest rates went on this Aston Martin. DHC: That doesn’t sound good. negative. Everybody seems to be Fed up. GCB: Well, you know, the party GCB: It’s even worse than that. There’s even talk of taking away my cher­ seems to be getting a bit out of hand. Maybe Nobody thinks I can get prices up. I’m ished independence. And I dread an early it’s time to take away the punch bowl. depressed. Inflation expectations are morning tweet exposing me as a fake. DHC: Get out, get out of my office! depressed. It’s a vicious cycle. Don’t they realize I saved the world from What’s the matter with you? Just because DHC: Did you try opening up and another Great Depression? Do they think you’re all boo­hoo­hoo doesn’t mean that talking about it more? that was easy? other people can’t be happy. No wonder GCB: Talking about it more? I give DHC: I’m sure it will get better. they call economics the dismal science. hundreds of speeches a year, everywhere GCB: Get better? It’s only going to Maybe we should let a lawyer run the cen­ from the Rotary Club in Cleveland to Chat­ get worse. The next recession comes, and tral bank. ham House in London. It just seems to end they’re all going to realize I’m just one big As GCB slinks out of DHC’s office, he up confusing everybody, including myself. fat zero. suffers one more indignity: The good doc- DHC: What do your colleagues say DHC: Zero? tor’s assistant asks him to pay for the ses- you should do? GCB: Yeah, you know, the zero lower sion in bitcoin. Then GCB spots someone in GCB: Some say I should stop bound. I’ve got this tool, and it’s useless. the anteroom he used to kibitz with but now obsessing, adopt a target range for infla­ Short­term interest rates can’t go much steers clear of. It’s just another sad sack tion—say, 1 percent to 2 percent—declare below zero. And everybody is going to nobody loves anymore, seeking DHC’s help: victory, and let Jeff Bezos have his way. know it. I could go cutesy and do some Macro Hedge Fund. I’m not so sure about that. Others say I more QE. But then they’d just blame me should double down and raise the target. for distorting financial markets and Miller covers the Federal Reserve for Jeez, I can’t even hit the one I’ve got. Then worsening income inequality. I just can’t win. Bloomberg News in Washington. Q1 2018 3 PORT<GO> Surveillance Bloomberg has ranked the biggest central banks on the accuracy of their outlooks By LUCY MEAKIN, DAVID GOODMAN and ANDRE TARTAR Which central bank is the most accurate forecaster? 5 NO CENTRAL BANK IS PERFECT, but for forecasting its key 1.3 percentage points. Since then, it’s gone the other way, with metric, the Bank of England is at the bottom of the pile. The an overshoot of about 1.1 percentage points. three-century-old institution has the worst record for Forecasting is a critical concern for central bank credibility, predicting inflation in its home economy, according to the because it provides the basis for monetary policy decisions that latest Bloomberg ranking of Group of Seven central banks.