Being a central banker is a miserable job. You’re there to spoil everyone else’s fun. When the economy is booming, and everyone is having a good time, you’re meant to stop things from getting out of hand by raising interest rates. You have to be Mr Unpopular. This perhaps explains why most of them are so bad at the job.
Central bankers don’t like being unpopular any more than the rest of us do – they’re only human. And it’s almost always more comfortable to lower interest rates than to raise them. Why? Because free money makes you popular. People like it when the cost of their mortgage falls. Journalists praise you for not making the ‘mistakes’ that led to the Great Depression. Even the likes of Mervyn King – who was very capable of speaking bluntly about the dangers of the housing boom – was somewhat reluctant to take steps to derail it.
This desire for popular appeal also explains why the Federal Reserve is keen to downplay the idea that quantitative easing (QE) has played any part in driving up commodity prices. After all, rising share prices are usually seen as a good thing. But pumping up the cost of fuel, food and basic building materials is not. So Fed chief Ben Bernanke is still arguing that inflationary pressures will be “transitory” and that there’s no reason to stop QE prematurely. However, he’s coming up against some resistance from his fellow central bankers. FT Alphaville highlighted an interesting piece of research from the Bank of Japan (BoJ) this week. To cut a long story short, the BoJ concludes that, although the surge in global commodity prices is partly down to recovering demand from emerging economies, the strength of the surge is down to QE-fuelled “speculative investment flows into commodity markets”. Inevitably, those higher prices are starting to be felt in the streets by consumers, even if high unemployment is preventing these pressures from being translated into rising wages.
The big question now for investors is: if QE is responsible for driving the price of everything from shares to commodity prices higher, what happens when it ends? Presumably, prices start to topple. That’s no doubt exactly what Bernanke is afraid of. However, with even his fellow Americans starting to notice that inflation is becoming an issue – Wal-Mart has warned of higher consumer prices, and chocolatier Hershey is putting up its prices by nearly 10% – it’s going to be hard for him to push for QE3 until it becomes plain that printed money was the only thing propping up much of the US economy. So we’d be very cautious of holding onto the cyclical stocks that have been beneficiaries of QE – stick with blue-chip defensives for now. And of course, hold onto gold for when Bernanke really cranks up the printing presses.