Forecasting anything, let alone something as complicated as the economy, is fraught. Stretches of decent growth and low inflation that look, in retrospect, like happy days, can be upended by unforeseen events. Covid, the descent into recession and the sharp rebound are just a few examples. Errors, unfortunately, are an unavoidable part of trying to map the future.
Everybody’s favorite contemporary villain is the Reserve Bank of Australia. Like global peers, the RBA has made its share of mistakes. Because most mortgages are tied directly to the benchmark rate, the pain from tightening is felt quickly, as is the joy from easing. Everybody has an opinion, some of which lack any sense of history and tend to be argued with a certainty that doesn't exist. Usually missing is a sense of perspective — and a bit of humility.
For calling this out, RBA Deputy Governor Andrew Hauser, a former Bank of England executive who began his new gig in February, has been vilified. In a recent speech titled “Beware False Prophets,” he conceded flaws in the RBA's record, but was scathing of pundits on the sidelines insisting on a better — and easier — way. He was critical of assessments that veer between an economy either going off a cliff or too hot. An evolution of views is often presented as a humiliating U-turn. Hauser stressed that uncertainty isn't a bug of forecasting, but a defining feature:
Eye-catching language sells newspapers, secures clients and draws crowds to the soapbox. But when the stakes are so high, claiming supreme confidence or certainty over what is an intrinsically uncertain and ambiguous outlook is a dangerous game. At best, it needlessly weaponizes an important but difficult process of discovery. At worst, it risks driving poor analysis and decision making.
Detractors claimed the remarks were an effort to muzzle scrutiny. Others pointed to the RBA’s missteps, such as a clumsy exit from the über-easy policies rolled out during the peak of the pandemic. How dare he chide us, when officials committed significant — and costly — errors? This is harsh. The RBA has often emphasized the precariousness of its projections, though not everyone has an ear for such qualifiers.
And the mistakes it made were firmly in the global mainstream. Yes, the authority was too keen to dismiss price spurts in late 2021 as short-lived. But in the years before Covid, the RBA was grappling with inflation that was consistently below its 2%-3% target. Federal Reserve Chair Jerome Powell will probably always be associated, not in a flattering way, with the word “transitory.” Let's not forget, however, the Fed's efforts to wrestle with the opposite of high inflation. In 2019, Powell described anemic prices as “one of the major challenges of our time.”
The problem isn’t that Hauser scrutinized the scrutineers. The challenge runs deeper: We live in a world where central banks are either heroes or zeros. Australians were perfectly happy to bask in the glory of a three-decade run without a recession. When visiting Sydney, where I started my career, from my then-base in Washington, I was amazed at the reverence accorded the RBA. Aussies thought there was some secret sauce that explained their economic performance; and superior policymaking was surely part of it, ran the argument. Now, the bank is a whipping boy. Talk radio in the US has culture wars; in Australia, it’s about populist rantings at the RBA from backseat drivers who have never met a central banker.
As for the political class, it is more than happy to take credit for a strong economy and equally enthusiastic about shifting the responsibility when things aren’t traveling so well. One of the virtues of central bank independence is that lawmakers don’t have to do the heavy lifting; when voters are upset about high inflation, high borrowing costs or a slowdown, they can blame monetary authorities.
Reading and re-reading Hauser’s remarks, and the sometimes vituperative response to them, I recall the climactic courtroom scene in the 1992 movie A Few Good Men. Lieutenant Daniel Kaffee, a callow young lawyer played by Tom Cruise, demands answers from Colonel Nathan Jessep, who is being questioned over the murder of a marine under his command. Jessep, played brilliantly by Jack Nicholson, shouts: “You can’t handle the truth!” How come? “I have a greater responsibility than you could possibly fathom,” asserts Jessep. “You don’t want the truth because deep down in places you don’t talk about at parties, you want me on that wall. You need me on that wall.”
Some speeches impress the more you review them. At first, I didn’t think much of Hauser’s address. But I have come around. Someone has to make the big calls, with imperfect information. A large chunk of the domestic conversation about the RBA does lack elevation, relative to debates in the US about the Fed. I’m sympathetic — with a dash of uncertainty. Until circumstances change.
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out our podcasts.
Bloomberg News provided this article. For more articles like this please visit bloomberg.com.
