Glenn Stevens' predicament: He wants us to believe interest rates are heading up without actually putting them up

I imagine it is a tough job being the nation's central banker. But the recent television interview with Glenn Stevens, RBA Governor, has made it quite clear the predicament he currently faces.

Stevens warned that property speculation is not the path to riches (the Real Estate Institute of Australia was apparently surprised by this statement). Obviously he is very worried about the stability of Australia's massive residential property market.  But to achieve the desired outcome, he needs to fool us all.

As I have mentioned before, the interest rate lever as a monetary policy tool is not exactly akin to a car accelerator. Sometimes we don't notice a change in speed because we don't have a speedometer to provide information - all we have are the other cars beside us as a reference point. When interest rate moves are made in predictable baby steps, we barely notice the relative change in speed with the cars beside us, and may not change our behaviour. However, if interest rate changes were sudden and unpredictable, we might get the message.

Steve Keen, amongst others, has noted that for monetary policy to be effective the public must be fooled. The IS-LM-BP model that underpins our understanding of monetary policy transmission fails under rational expectations.  If the public’s expectations are in line with monetary policy changes, they are ineffective. Expectations must not be met.

I am guessing his preferred outcome is for lenders to tighten standards on home loans and for buyers to be more cautious about taking on housing debt, so that he doesn’t actually need to increase the debt burden on the economy. He wants us to think interest rates are going to be higher in the future without actually having to follow through with the increases.