Last month, Bank of Canada Governor Stephen Poloz gave a speech at the Federal Reserve Bank of San Francisco. He was introduced by Sylvain Leduc, whom Poloz hired as a deputy governor in 2016 but then lost to the Federal Reserve System in 2018.
“I can’t think of a better person to have led the Bank of Canada through very tumultuous times,” Leduc, who is now director of research and executive vice-president at the San Francisco Fed, said of his former boss. “Governor Poloz was really tailor-made to deal with the trade tensions that impacted very negatively Canadian exports and Canadian investment.”
I thought I’d borrow Leduc’s introduction to get us started on processing the news that Poloz, who turned 64 in October, will retire when his seven-year term ends in early June of 2020.
Poloz’s distinguishing feature as a policymaker was his ability to get inside the heads of executives.
He was a standout at University of Western Ontario, and was tapped to help lay the groundwork for the Bank of Canada’s switch to inflation targeting in the early 1990s. But he went walkabout in the real economy soon after that, eventually ending up as chief executive of Export Development Canada in 2011.
When he was named BoC governor two years later, Poloz said he had spoken with more than 70 chief executives in the past year. He kept that up as governor, making a point of assembling actual economic actors to build up his store of anecdotal evidence of what was happening on the ground.
That made a difference. He oversaw an interest rate cut in January 2015 before it had become obvious that the oil-price collapse would cause serious damage. When the economy nearly stalled last winter, he led the Governing Council to the sidelines, but he didn’t panic by reversing recent rate increases, as he sensed that unusually severe weather was skewing the trade numbers. He was right.
His time at EDC “gives him a very unique perspective to understand the issues exporters are facing,” Leduc said.
We may need a governor who is willing to challenge the status quo of central banking.
Charles St-Arnaud, chief economist at Credit Union Central of Alberta, formerly of Bank of Canada and the Finance Department
If we can be lucky enough to hire a bespoke governor for the next seven years, what might he or she look like?
Claire Kennedy, a tax lawyer from Toronto, will spend the next several months pondering that question. As the lead independent director on the Bank of Canada’s board, it’s her job to organize the search for Poloz’s replacement.
She will post the job description early in the new year and will submit a recommendation to Finance Minister Bill Morneau by the spring, the Bank of Canada said. Morneau and the federal cabinet can accept the board’s recommendation or make their own choice.
From up here in the cheap seats, it seems candidates will need at least four attributes: decent technical ability, excellent communication skills, a certain wiliness around politicians, and an open mind to the possibility that the economy that exists now might be different than the one they learned about in grad school.
The next governor will begin her or his term under a cloud. Few forecasters predict a U.S. recession in the short term, but almost all of them acknowledge the possibility. So Kennedy’s hiring committee should select someone with an understanding of all the tricks that central banks have developed since the financial crisis to provide stimulus when interest rates are at zero. The Canadian benchmark rate was 4.5 per cent in December 2007, when the central bank started cutting interest rates to counter what would become the Great Recession. The policy rate is only 1.75 per cent today.
Technical prowess should be easy enough to find. The pool of world-class technicians with communications skills to match will be smaller. Not so long ago, it was taken for granted that the primary requirement for running a central bank was PhD in economics. But central banking has changed. The Fed and the European Central Bank are run by lawyers, not economists, evidence that the increasingly public role of central banks demands leaders who are comfortable in the spotlight.
Communication can no longer be vague.
Charles St-Arnaud, former Bank of Canada economist
“The role has evolved in a way that we are asking governors to be much better communicators,” said Charles St-Arnaud, chief economist at Credit Union Central of Alberta, who worked at the Bank of Canada and the Finance Department earlier in his career. “Communication can no longer be vague.”
Canada’s next central bank governor must also be ready to overhaul the way monetary policy is done.
At a minimum, he or she will be in charge of a multi-year rethink that could result in a decision to scrap the Bank of Canada’s inflation target in favour of something else. With interest rates so low and household debt so high, fiscal policy could emerge as the best way to provide economic stability, raising questions about how the Bank of Canada should interact with the Finance Department. It seems certain that digital currencies will go mainstream soon; central banks will have to decide whether they will lead that charge, or if private companies such as Facebook Inc. can be trusted to do it.
Political considerations will arise. The Trudeau government surely would love to appoint a woman, and none of the nine governors to date has been French Canadian. The Bank of Canada’s all-white, mostly male Governing Council certainly would benefit from some diversity. But the primary attribute should be an openness to dramatic change.
“We may need a governor who is willing to challenge the status quo of central banking,” St-Arnaud said.