Philipp Hildebrand Central Banks Need Long Game

The former president of the Swiss central bank, now a vice president of asset management giant BlackRock, discusses financial market jitters and the challenge of moving away from emergency monetary policy.
Philip Hildebrand says that the current market turmoil is just a blip.

In recent days the stock markets have been a roller-coaster ride for investors, set off by fears of an economic crash in China and worries over when and if the U.S. central bank, the Federal Reserve, might raise interest rates.

But the markets’ ups and downs have not darkened the good mood of Philipp Hildebrand, vice chairman and member of the global executive committee of BlackRock, the world’s largest asset manager. The former president of the Swiss central bank advises his former colleagues around the world to stay calm.

And while he may no longer be in the job, he still has a pretty clear view of what needs to happen with global monetary policy. His message is simple: The emergency phase of monetary policy phase, which has existed since the 2008 financial crisis, needs to end soon.


In the past few days the top central bankers of the world met in Jackson Hole, Wyoming. What would you have said if you had been asked to give a presentation?

Right now for me there are two big issues. The first is that the most important central banks in the world, Japan, Europe, the U.S., Britain and also Switzerland, are still pursuing an emergency monetary policy. And the question is if these extreme monetary policies are still appropriate, especially in the U.S. The second issue that the central banks are dealing with is how they should interpret the slow productivity growth. This slow productivity growth is inconsistent with the digital revolution and the associated new technological possibilities. It raises the question: what conclusions should monetary policy take from this?

After the recent turbulence in the financial markets, are you still anticipating that the Fed will raise interest rates in September?

A central bank should not let itself be ruffled by short-term market turbulence. Central banks should concentrate on the fundamental, important questions. Incidentally, I think it’s not right to speak of a tightening of monetary policy for the U.S. central bank. It’s much more about whether the Fed will take the first step away from expansive monetary policy this year. It’s about whether, six years after the crisis, the U.S. economy still needs such an extremely relaxed monetary policy.

Can the Fed afford a rate hike with the slowdown in growth in China? Experts fear that China could trigger a new global economic slowdown.

I’m again amazed at how the short-term assessments change. China is in the process of a historically unique economic reform. The idea is to move away from the dependence of its growth model on exports and to focus more on the domestic economy. This transformation is positive for China and also necessary. This transformation is also good for the rest of the world because it rebalances the forces of growth. But this process of change necessarily creates a slowdown of China’s economic growth. This isn’t dangerous; instead it’s to be welcomed. I think the current nervousness about China is excessive.

If the slowdown in China got worse, would that then be a serious problem for the global economy?

That would certainly be the case. China is the second-largest economy in the world and increasingly integrated with other economies. A major slowdown would of course have consequences. But what I’ve seen so far in terms of a slowdown in China does not worry me particularly, because it’s the effect of the reorganization of the Chinese growth model. Everyone involved needs to keep their nerves in check. It would be much more worrisome if there were signs that those in power in China were turning away from these reforms and changes to its economy.

Has that not already happened? Isn’t the devaluation of the Chinese currency an indication that Beijing again is focusing on exports for the country’s growth?

I don’t see signs to that effect. The fact is that the Chinese government has taken further steps recently to liberalize their currency. At the same time, the domestic economy has weakened. This leads naturally to a certain weakening of the currency. We’ve witnessed the same phenomenon in the U.S. and Europe. You have to remember that the dollar lost about 30% of its value after the crisis. Now, we’re seeing the same dynamics in China. If we were to see an active devaluation policy, that would be cause for concern. But for me, the weakening of the yuan is moving in line with the slowdown in the economy. So there is no reason to imply the onset of a currency war.

Some prominent economists see it differently. Former U.S. Treasury Secretary Larry Summers, for example, is convinced that, given the economic problems in China, raising interest rates in the U.S. would be premature.

The Fed’s decision-making process ultimately rests on three factors: The economy’s capacity-utilization ratio, unemployment and price dynamics. If you look at these three factors, there are fewer and fewer reasons for the Fed to maintain its emergency monetary policy. The fact that the markets are volatile ahead of an interest rate policy reversal in the United States is nothing unusual.

The markets have become quite dependent on the ultra-loose monetary policy. Don’t interest rate increases threaten upheavals in the markets?

I also see this as a problem. The markets think on an extremely short-term basis and see the emergency monetary policy as the new state of normal. This is why I think this extremely loose monetary policy should not last much longer. The change will not be easy, the market swings will be large, but that's part of the necessary adjustment phase. It will not be without pain. Also, despite the quantitative easing in the United States, growth rates are lagging behind expectations. The loose monetary policy has led to risk-weighted assets such as equities sharply rising in price. Now we're seeing those ratings once again adjusting to the actual economic outlook.

How do you assess the situation in the euro zone? Should the ECB extend its bond-buying (quantitative easing) program to September 2016?

This debate I think is entirely premature.

If the Fed raises interest rates, and by contrast, the European Central Bank leaves its foot on the gas, what kinds of problems can be caused if the two most important central banks pursue contradictory policies?

I would consider that pretty normal. It is not uncommon for the economies of the major economic blocs to be asynchronous. The situation is again normalizing but at different speeds. The healing process is coming along, but is certainly not yet complete. We still have too much debt. The banks continue to adjust their business models to the new regulation.

If everything is so normal, why the agitation in the markets?

We are approaching a fundamental change in the market environment. Such a moment involves inevitable uncertainty. Add to that something else: In the past I was often the youngest in the economic policy sessions, now I'll be one of the oldest. Many young traders never experienced the Asian financial crisis of the 1990s or the more recent global financial crisis for that matter. For them, these developments, which are actually normal, are new and worrying.

And the massive amount of cash draining from emerging markets that we’re currently seeing, this is also nothing special?

That's the way it is. The upswing in the emerging markets was driven by two forces: The first from China’s boom and the second from the decline in interest rates. Neither force can last forever. And when emerging market countries still have structural problems, they are vulnerable. In my opinion, this will not have profound repercussions on Europe and the U.S. The weakening of exports to China is certainly painful for German industry, but exports cannot grow indefinitely. At the same time, however, other markets are recovering, such as Spain.

Where do you see the biggest risks?

The greatest danger would be if it’s not possible to increase the growth potential in the United States and Europe. And this is where the question of why productivity is growing so slowly comes into play. In order to increase growth, you do not need stimulus programs. What you need are structural reforms, and that is a political issue.

So what could the central banks do?

What is needed is to reverse the emergency measures taken by central banks. As we have experienced in Switzerland, if you bring in emergency policies such as the introduction of the minimum exchange rate, there is always the risk that the market participants get used to it and depend on it. Emergency measures must remain emergency measures. If we miss the opportunity to get out of this crisis mode, then there will be problems and the adjustment will be more difficult.

So it was right when your successor, the current head of the Swiss National Bank, lifted the minimum exchange rate of the franc against the euro in Janaury?

I'm will not comment on the monetary policy of my successor, but basically no emergency measure should be a permanent condition. At some point this emergency measure is no longer sustainable or no longer needed. Ending the emergency measure is always a tricky business, but there is no way around it.

You don’t see another financial crisis on the horizon, but if another came along, how prepared are the central banks? Their options have long since been exhausted.

I don’t see it so grimly. You can always extend existing funds, such as with a "QE4" quantitative easing program in the United States or the expansion of the bond-purchase program of the ECB in Europe.

Are you glad to no longer be a central banker in the spotlight?

The increasing pressure on the central banks makes every former central banker worry. Axel Weber (a former Bundesbank president) and others emphasize again and again that we must not overburden monetary policy, and that the politicians must do their part. In principle, monetary policy can achieve two things: creating a healthy environment by ensuring price stability and intervening in a crisis with emergency measures. And so we are back to the beginning of our conversation. These special measures must at some point expire. Even if it hurts.


Holger Alich is Handelsblatt's Switzerland correspondent, covering the financial industry. To contact the author: [email protected]