The market reaction to Draghi’s indication, once again, that interest rate policy has run its course, will be debated for some time. Draghi delivered the goods that many investors said was lacking last December. The ECB policy more than anyone expected.  

All the boxes were checked. Although the end date was not extended beyond March 2017, the four-year TLTROS will run into the new decade, and Draghi indicated that rates will remain low well beyond the end of the asset purchases. Moreover, the deadline was always soft.  

Many participants seem to have confused interest rate policy with monetary policy. The ECB has taken significant unorthodox measures, expanding monetary policy well beyond the price of money itself. Although we question the wisdom of removing interest rates from its toolkit, Draghi was directing investors attention going forward back to QE. Some reports suggest that after easing the ECB “stepped back.” We do not think this is a fair representation of what Draghi said.  

In addition, there are three different issues that should not be conflated when thinking about the credibility of monetary policy: desirability, necessity, and effectiveness of the measures. The new staff forecasts and the renewed deflationary pressures required some monetary response. The issues of effectiveness is important, but one cannot judge that based on a few hours of price action. That said, even in the US experience, there was some evidence of diminishing returns.  

It does not mean that central banks have lost their credibility or the monetary policy does not work. Indeed, we compare it to taking aspirin to get rid of a headache. You take two aspirins, but and hour later you still have a headache. Does it mean that aspirin does not work? Does it mean that the doctor has lost her credibility? You decided to take two more aspirin, and an hour later our headache may have dulled, but it is still there. You take two more aspirin and all of the sudden you are drowsy and fall asleep.