A few things worth linking to, about which I have little to say:
1. Martin Weale’s speech from last week, “Slack and the labour market” is excellent. Weale estimates a 1.1% shortfall in total hours worked, accounting for over- and under-employment. This translates to a 0.8% shortfall in real GDP due to labour market slack. I would like to see some serious responses to this from supply-side optimists. One possible line of inquiry is on self-employment, which Weale only addresses briefly.
2. Tony Yates has a very interesting post on “One big hubristic consultancy jargon firework display” as he describes the BoE review. Worth a read if you are interested in BoE politics, as is Tony’s blog.
3. The John Mills/Civitas “There is an alternative” paper is out, and is very strange. Mills wants to devalue the pound, and sees that being an “alternative” to “monetary policy”. He doesn’t say how we should devalue the pound, though he favourably references the Yen devaluation under Abenomics. Mills does (implicitly) want faster NGDP growth and accepts that 3% CPI is a necessary consequence, but believes none of that has anything to do with monetary (or indeed fiscal) policy. The paper also exhibits a very, very bad fetish for manufacturing. Ben Southwood already provided a very good critique of the Mills proposal last year.
A short note. Faisal Islam got his hands – literally – on the giants and titans. A fascinating quirk of British monetary history is the existence of £1m (“giants”) and £100m (“titans”) Bank of England notes, which are used as assets backing sterling banknotes issued privately by commercial banks in Scotland and Northern Ireland.
The video is here and is mostly about Carney’s speech on Scottish independence. The Bank’s web site has more information about Scotland & NI currency and the “backing assets”. George Selgin wrote a very good post on Scotland and the pound last year.
I am curious, how many objects are there in the world worth (nominally) £100m which you can hold in your hands? Some artwork… jewellery?
The Bank’s forecasts for real GDP growth over the next two years. 2014: 2.8%, 2015: 2.3%. WHAT A BOOM. What an explosion of growth! In the Inflation Report press conference today, the press first asked lots of sensible questions about forward guidance and monetary policy – you know, the things the MPC are actually responsible for. But there was an elephant in the room, something was weighing on the minds of assembled hacks… see if you can spot it.
Richard Barley, Wall Street Journal: … Because I guess the concern is that so far we’ve seen perhaps some worrying signs of returning to the old normal and greater lending, reliance on house prices.
Guy Faulconbridge, Reuters: Just a follow on on the housing, I see you have a section on property. Do you see any signs of a bubble in any regions of the British housing market, because overall it’s fine to say that perhaps prices are still below the 2007 peak, but in London dinner parties the prices that you pay for prime real estate in London is kind of the main topic of discussion.
Tim Wallace, City AM: Governor, another one on housing.
Maybe hold the press conference up North somewhere next time?
Paul Tucker is leaving the MPC later in the year. That’s the good news. Here’s a quote from his speech today which I cannot resist ridiculing:
It is sometimes suggested that independent central bankers are more averse to inflation than to periods of low growth and increased unemployment.
Gee whiz, Paul, really? Why could that be?
I hope the past few years have demonstrated that, in fact, it is the credibility of the Bank of England’s commitment to price stability that enabled us to provide such exceptional monetary support to help the recovery.
Oh. So… during a period with the worst real GDP growth on record, and high unemployment, what you’re saying… as you and your colleagues have done in speech after speech… is that what really matters is the Bank’s “commitment to price stability”?
It is unimaginable that, prior to Bank independence in 1997, any government would have been able to hold the policy rate at effectively zero and make a further monetary injection of £375bn without inflationary expectations – and government financing costs – spiralling out of control.
Inflationary expectations… hmmm… wait. For some reason I am getting the impression that independent central bankers are more averse to inflation than to periods of low growth and increased unemployment. But it must be the voices in my head.
(Those three sentences really are placed together in that order in his speech, I’m not making this up. Tucker also has a delicious reference to his definition of the phrase “escape velocity”, with a footnote referencing his remarks in 2011 to the TSC. It’s hard to know what he is getting at.)
There was an almighty showdown: Mr. King found himself confronted by a powerful coalition including Chancellor of the Exchequer Alistair Darling, top Treasury officials, the Financial Services Authority led by its then-chairmen Adair Turner, and senior members of the BOE’s Court. All demanded that he do something to stem the deepening credit crunch. Much to Mr. King’s fury, Bank of England Deputy Governor Paul Tucker had circulated a paper to top officials at the BOE suggesting the central bank set up a new long-term funding facility that would allow banks to use their illiquid mortgage portfolios as collateral. A concerted effort was made to force Mr. King to agree to the plan. In a night of high drama involving a series of late phone calls, Mr. King relented and the Special Liquidity Scheme was born.
The SLS was arguably the single most successful crisis response deployed in the U.K.
Stop right there Mr. Nixon, I can’t resist this one…
The UK’s major foray into creditism co-incided with the worst collapse in aggregate demand on record, before or since. If that’s success, I’d hate to see what failure looked like.
Mark Carney tried to explain Woodfordian monetary policy to some reasonably smart MPs today and he failed completely. “Train wreck” would be a moderate description of how badly that Select Committee meeting went.
Is the 7% unemployment rate a target? Erm, well, you see…
What will happen if the 2.5% inflation knockout triggers? Erm, well, you see…
Are higher interest rates a sign of looser or tighter monetary policy? Erm, well, you see…
Is forward guidance a loosening or a tightening of monetary policy? Erm, well, you see…
That was an awful public performance and painful to watch. Carney has an impressive grasp of the UK data, but he was struggling to explain something as simple as the stance of monetary policy when forced to rely on the language of interest rates and “state-contingent guidance”, etc. I’m sure it would be much simpler if he could stick to money and nominal incomes!
I’m back from the beach… and I want you to recall the quotes from Mervyn King’s infamous “Black Clouds” speech of June 2012:
… a large black cloud of uncertainty hanging over not only the euro area but our economy too …
… Complete uncertainty means that the risks to prospective investments … are simply impossible to quantify …
… the black cloud of uncertainty and higher bank funding costs …
… The paralysing effect of uncertainty, with consumers and businesses holding back from commitments to spending …
… the black cloud of uncertainty has created extreme private sector risk aversion …
… private sector spending is depressed by extreme uncertainty …
… during the present period of heightened uncertainty …
Contrast with the quotes I can cherry-pick from Mark Carney’s first speech as Governor:
We aim to get there in part by reducing the uncertainty that has held back growth.
… First, we are giving confidence that interest rates won’t go up until jobs, incomes and spending are recovering at a sustainable pace.
… Our forward guidance provides you with the certainty …
… should give greater confidence …
Our forward guidance acts as a stabiliser, …
However much I dislike the specifics of BoE policy, it would be churlish of me not to say it: this is much, much better. This is how a central bank Governor should talk; certainty, confidence, stability. Mark Carney is doing his job, and that is a good thing.
The simplest way to tell that there was no massive change in the BoE’s policy stance yesterday is to look at the forecasts. The forecasts for inflation are basically unchanged since the May inflation report.
The Bank is still expecting to hit its 2% target at around the two year horizon, and then slightly undershoot from mid-2015 onwards.
Simon Wren-Lewis is right to claim that the Bank isn’t targeting 2% inflation on the two year horizon. At two decimal places, the Bank’s median forecast for the CPI rate is 1.96% on the two year horizon. That’s what you meant, Simon, right?
Please, everybody, apply more Svensson. The Bank’s forecasts are what the Bank is targeting. There is no difference between the two. The forecasts tell us exactly what the Bank expects to happen to the UK economy.
Carney made it 100% clear that the MPC will adjust the “tools” of policy if they do not think the economy is on an acceptable course. He made it 100% clear that the MPC do think the economy is currently on an acceptable course; that is why they did not adjust QE/talk down rates/extend FLS/or whatever at the August MPC meeting.
It is 100% clear that the course the MPC currently expects the economy to follow is most likely to involve unemployment staying above 7% for the next three years. We now have the fan charts to prove it.
Ergo, the Bank of England is now targeting high unemployment.
It cannot get any clearer, or more transparent than that. It is a welcome improvement in transparency! The Bank have made it 100% clear that “price stability” remains dominant over all other concerns. No wonder the hawks signed up.
IR & press conference roundup:
1. Carney gave an impressively scary “steely eyed hawk” look to the WSJ’s Simon Nixon (who is a hawk, duh, like all WSJ employees) when pressed on whether the Bank cared if house prices rose 15% next year. “No, Mr. Bond, we expect you to die.” – uh sorry, no, he said they were going to target 2% inflation (HT Marcus).
2. There was no addition to the BoE’s current levels of creditism. Celebration!
3. Scott rightly points out that UK monetary policy is still significantly looser than it was this time last year (market inflation expectations and equities up), even though the MPC undershot expectations. True. It is worth noting that the MPC has now undershot expectations with three consecutive announcements: the July MPC minutes, the August MPC decision, and now the IR.
4. Bill Keegan (Observer) asks the obligatory “but what about the tight, tight fiscal policy?” question. Carney, paraphrased: “Good one Bill, very funny. We don’t give a damn about fiscal policy, we only care about the CPI. Have you seen the CPI figures, Bill? They’re shocking.”
5. David Smith (Sunday Times) tries to trip up the new kid in town, quoting the RPI-based market inflation expectations. Carney is not at all amused. Don’t expect any exclusive interviews with the Guv’nor any time soon, Mr. Smith.
Any fiscalist who thinks this is a worthwhile improvement in UK monetary policy can take their plans to “do public works and create jobs”, get in their time machines, and bugger off back to the 1970s. The hawks were totally victorious today.
I must end with a special mention for one Mr. Ed Balls MP, whose response to the IR provides us this with this priceless quote:
Given the high inflation we have seen over the last couple of years it will be very important that the MPC stays vigilant to inflationary risks.
Thanks so much for that one, Mr. Balls. Apparently, those who failed to learn from Japan are indeed doomed to emulate it.
The Committee intends at a minimum to maintain the current highly stimulative stance of monetary policy until economic slack has been substantially reduced, provided this does not entail material risks to either price stability or financial stability.
In particular, the MPC intends not to raise Bank Rate from its current level of 0.5% at least until the Labour Force Survey headline measure of the unemployment rate has fallen to a threshold of 7%, subject to the conditions below.
Very, very weak. From the press conference intro:
Today’s Inflation Report contains for the first time, in Chart 5.10 on page 47, the MPC’s projection for unemployment. It shows that, with Bank Rate remaining constant at 0.5% throughout the 3-year forecast period, the MPC’s best collective judgement is that the median unemployment rate at the end of the projection period is 7.3%. Chart 5.11 on page 48, also new in this Report, shows that unemployment is judged by the MPC to be as likely to reach the 7% threshold beyond the three year forecast horizon as before.
The MPC expects to fail. As with the Fed, we could have unemployment at 8% for the next century and the MPC cannot be judged to have deviated from its guidance.
Markets dropped on this announcement, so this is an effective tightening of policy versus what was expected. Osborne’s gamble failed.