By Paul Hannon
When the European Central Bank explains how it will reduce its bond purchases, it will be at pains to avoid the word that everyone else uses: tapering.
ECB President Mario Draghi will confront his latest linguistic challenge Thursday, when he is expected to announce that he and his 24 colleagues on the governing council have agreed to reduce their bond purchases from January.
Investors, traders and analysts who follow the ECB's actions are already describing this anticipated move as "tapering." But that is not a phrase Mr. Draghi is likely to employ. That is because the watchers are anticipating the termination point for a journey that Mr. Draghi may not want to admit he is on.
The term entered popular use when then U.S. Federal Reserve Chairman Ben Bernanke first suggested the U.S. central bank was planning to reduce its bond purchases in June 2013. The subsequent sharp drops in asset prices around the world became known as "the taper tantrum."
Mr. Draghi has already offered his definition of the term when explaining why it wasn't the right way to describe the central bank's December decision to cut its monthly bond purchases to EUR60 billion from EUR80 billion.
"The word has several meanings depending on who is using it, but the natural way to look at a word like that is to have a policy whereby purchases would gradually go to zero," he said at a news conference held to explain the move. "And that's not been discussed. As a matter of fact, it's not even been on the table."
When Mr. Draghi does want to talk about how the size of the bond-buying program might change, he uses the word "calibrate." So rather than announcing a tapering of its program on Thursday, the ECB will most likely talk about "recalibrating" its purchases.
There are reasons for its choice of words. Firstly, ECB policy makers are unlikely to be certain that they can end the program by a particular date. In addition, they may not want to give the impression that ending the program is a goal in itself, as distinct from finding the right policy settings for the economic situation as it evolves. Tapering will be something that becomes visible in the rearview mirror, rather than a destination programed into the navigation system.
Secondly, there is a downside for central banks in being too clear about where they are likely to end up. Investors and traders have a tendency to jump ahead to the next thing, and once it is firmly established that quantitative easing is being wound down, they will likely focus on when the ECB's key interest rate will start to rise. That could push up borrowing costs more quickly than the ECB would like.
If the Fed's experience is a guide, it will be a challenge for the ECB to keep investors and traders in the here and now. Back in 2013, Mr. Bernanke didn't use the word "taper" when his comments sparked the notorious tantrum. Indeed, he said pretty much what Mr. Draghi is likely to say.
"A step to reduce the flow of purchases would not be an automatic, mechanistic process to end the program," Mr. Bernanke said.
Even when the Federal Reserve embarked on a reduction in bond buys that did taper to zero by October 2014, it was careful not to fully commit to such a course. In their December 2013 statement, the Fed's policy makers said that while they were likely to "reduce the pace of asset purchases in further measured steps at future meetings," they were "not on a preset course" and subsequent steps would depend on economic conditions.
Back then, as now, investors and traders have concluded that central banks are on a path back toward more normal policy settings. In the ECB's case, they are also very aware that the central bank is soon going to run out of bonds to buy if it sticks to its self-imposed rules.
So there is really no other direction to go in. Like the Fed, the ECB is likely to stress that it hasn't set a firm trajectory for its bond purchases. What the markets will likely hear is "tapering."
Write to Paul Hannon at [email protected]