The Central Bank Watcher
Substack #1 Why the Central Bank Watcher?
Happy New Year and welcome to my first Substack!
About me
Today is the first day of my retirement, after having worked in the City of London for a little over 42 years. In that time, I have been both a trader and investor, focusing largely on government bonds, money markets, economics and central banks. I most recently worked at Ninety One, the global investment manager, but have also worked at Investec Bank, Cazenove, merchant bankers Samuel Montagu & Co and bill brokers Clive Discount.
Why am I writing this?
I strongly believe that there is a gap for somebody to explain the actions, motivations and implications of central bank policy more clearly to both the general reader and those working in the finance industry.
Why is there a gap?
By its nature, monetary policy is technical and specialised, but the implications of central bank actions can be far reaching.
However, surveys regularly show that the general public are not properly aware of who sets interest rates or what the impact of this might be. For example, the Bank of England in association with Ipsos, survey the public anually on exactly these questions as part of their quarterly Inflation Attitudes Survey. In the most recent, published in February 2024, survey respondents were asked ‘Each month, a group of people meets to set Britain's basic interest rate level. Do you know what this group is?’ Just under half answered the Bank of England, with 15% correctly identifying the Monetary Policy Committee. However, 14% thought it was either the Government or HM Treasury and 21% responded with ‘don’t know.’
Similarly, in the United States, a 2022 Axios/Ipsos poll showed that 21% of respondents knew nothing at all about the responsibilities of the Federal Reserve, 33% said they didn’t know very much and 38% reported that they knew just a little. Only 7% say they know a lot about the Fed’s responsibilities.
There is clearly scope, therefore, for the general reader to better understand central banking given policymakers have a real impact on our day to day lives.
More surprising, over my long career I found that financial market participants, outside of a narrow range of government bond, money market and foreign exchange specialists, had only a superficial knowledge of central bank policies, despite these policies being the bedrock of the entire financial system. I often thought it was akin to plumbing; we all know it’s crucial to our day to day lives, and can have a huge impact when it goes wrong, but few of us really know how it works. Perhaps it is only natural that, given the sheer volume of information those who work in finance have to digest, the plumbing gets, at best, a cursory check. In practice, this means reading a one line news alert, or a 10 second summary from an analyst before moving onto the next bit of news. Central banking, however, is far more complex than this, and moves at a different speed to financial markets. The subtlety, risks and qualifications around a particular view are often lost, and certainly can’t be encompassed in a single line of a rolling news feed. This likely explains why financial markets are bad at predicting the future path of interest rates and are occasionally wrong footed by the outcome of a policy meeting. A good recent example would be the modest increase in Japanese official interest rates at the end of July 2024. A close reading of communication from the Bank would have shown that, if the economy continued to track forecasts, rates would slowly be increased. With the Yen under pressure, and this weakness becoming political, it was should not have been a surprise when rates were lifted. However, the general consensus was not aligned to this view, most likely as market participants did not have the time or inclination to trawl through (and often translate into English) Bank communication. As a result, all hell broke loose in thin summer markets.
For finance professionals, the cost of money, which is set by central banks, is the bedrock of the financial system and all participants should look beyond the headline to better understand the subtlety, risks and qualifications around a particular view.
What specifically will I write about in my Substack?
I aim to write at two levels, targeting both finance professionals, and the general reader. For the latter, I hope to improve understanding by explaining in concise and clear terms what actions a central bank has taken (or might take), why this has happened and what does this mean in practice? For those in the finance sector and those with a deeper understanding, I will expand on the ‘what, why and so what’ approach above with a particular emphasis on why is this is important, especially if not discounted.
I intend to focus on the US Federal Reserve, the European Central Bank, the Bank of Japan, the Bank of England and occasionally the Swiss National Bank. I would love to analyse and write about the People’s Bank of China, but they rarely communicate and largely act as implementers of policy directives issued by the Politburo. As such, it is very hard to add any insight or value.
How often will I post?
When I was working, whenever I received a research pitch from a bank salesperson, I would always ask if their research could tell me something that I don’t already know. Whilst this might sound arrogant, it was never meant to be; rather it simply meant give me an insight, an angle I was not aware of, or a challenge to my own view. If they could do this, I always felt they were adding value. As such, I will try to provide the same and only post when there is something to say which fulfils the criteria of ‘tell me something I don’t know.’ In practice, I suspect this will average out at one post per week, with more frequent pieces around policy meetings and less during holiday periods.
How do I tell people something they might not know?
Like anybody who has done something for a long time, you intuitively know what’s important and what’s not. Now that I am retired, I hope to use that experience, especially as I also now have far more time, to go beyond the headlines and write regularly on the ‘what, why and so what’ of central banking.
Business model
Central bank policy has always been the lens through which I view financial markets and economics. I hope that writing about it on Substack can shine a light onto a niche but crucial subject to a much wider audience.
If you enjoy what I write, please feel free to share with any of your own contacts who you think might enjoy it too.
It is my intention to provide this free to subscribers for twelve months in order to determine if there is an appetite for my writing. I will then review feedback and decide if it should be become a subscriber model.
Thanks for reading. I wish you all a happy and healthy 2025.
Russell