What does Christine Lagarde have in store for us?

At the end of the month, the Italian will hand over the keys to his home in the Eurotower to the Frenchwoman. However, Lagarde does not wait until the end of the month to make himself heard. For example, she recently reported that central bank policy should be based on facts and economic data. She wants to make sure that the ECB focuses on job creation, productivity and stability. She scares the hell out of me with that.

Take, for example, the sentence that policy must be based on economic data and facts. Central bank actions (such as interest rate changes) affect economic growth and inflation with a lag. There is quite a bit of time between the moment that the bank makes borrowing money cheaper or more expensive for the banks and the moment that those interest rate changes are passed on to the consumer. It will then take time before the end customer is stimulated by those interest rate changes to adjust his behavior.

No action
This means that a central bank by definition does not take action if the economic data (including inflation figures or figures on economic growth) show economic facts. Due to the delay in the monetary mechanism, the modern central bank must anticipate future developments. In other words: if Lagarde waits for facts and economic data, she is not only lagging behind the facts, but pursuing the wrong policies.

If, for example, central banks lower interest rates, the economy will probably notice this when it recovers. As the policymaker, you then add fuel to the fire (just when you need to put out the fire and you only put out the fire when you need to stoke it). If the ECB raises interest rates to slow down the economy, it will slow down (due to the aforementioned delays) when growth is already declining. Although, the latter does not necessarily have to be the case at the ECB (under Lagarde).

That's what she said the ECB create jobs, boost productivity and ensure stability. It therefore appears as if Lagarde believes that the ECB should not actually increase interest rates. These interest rate increases slow growth, which destroys jobs. But, even worse about the jobs-productivity-stability statement, I think that Lagarde nowhere fails to mention the only objective mentioned in the Maastricht Treaty (price stability).

Create jobs
Moreover, I wonder how the ECB wants to create and how the bank wants to manage productivity? Companies create jobs and they do so when economic prospects are good. The policies that Lagarde apparently advocates are more bad than good for economic development in the medium term. With a little imagination you can figure out how the central bank can create jobs, but that is particularly difficult with regard to productivity.

This is increasing due to better training, investments in research and education and modern infrastructure. Will the central bank take over schools and research centers and build 5G networks itself? Someone needs to tell Lagarde what monetary policy can achieve, and certainly also what it cannot. Wanting too much means a great risk of wrong policies and undesirable economic outcomes.

High inflation
I think what Lagarde wants is worse than a central banker who says he wants high inflation. He or she at least knows what the bank can and cannot do. Investors can cheer a bit about her words. When Lagarde says he wants to provide jobs and stability, I reason as follows: creating jobs happens when the economy grows or when growth is not threatened. This will be at risk if, for example, there is a threat of financial instability. This may be the case if share prices fall and interest rates rise.

Is Lagarde saying that the European Central Bank will do everything it can to support prices? Has Lagarde implicitly indicated that there is a Lagarde put (a level of stock prices at which if prices fall, the ECB will take action to push prices up)? That is the question.