Sir Mervyn King has in the past been of the sort of central banker that has, at every opportunity, extolled the virtues of inflation targeting.
So comments at yesterday’s Inflation Report press conference, where the governor conceded that the Bank of England’s monetary policy framework has its deficiencies, were something of a surprise. Here’s what he said:
“I do think the experience of the last four to five years has raised some question marks about what inflation targeting can hope to achieve and whether it’s sufficient. I think our feeling now is, on its own, it’s not sufficient, it did not prevent the build up of a large degree of financial instability. And there is I think a debate to be had about whether other instruments are the right way to deal with that, through our Financial Policy Committee, or whether monetary policy should take other considerations into account.”
Could this be the beginning of the end for the Bank of England’s inflation target, at least in its current guise?
It’s far too early to say. Besides, with the governor due to depart mid-way through next year, whether or not the Bank alters its monetary policy framework will largely depend on the views of Sir Mervyn’s successor.
However, his calls for a debate could prove significant.
The year was 2002. The US was on shaky economic footing, still reeling from stock market declines and the as-yet uncertain prospect of a two-pronged conflict in the Middle East. And Alan Greenspan, then Fed chairman, was worried about consumer spending.
Alan Greenspan addressed the FOMC. According to his recently-released draft paper, published by the Brookings Institution, he was aware that “almost all market participants” were aware of the growing risks in the mortgage market:
I expressed my concerns before the Federal Open Market Committee that ‘. . . our extraordinary housing boom . . . financed by very large increases in mortgage debt – cannot continue indefinitely.’ It lasted until 2006.
The transcript from the meeting shows Mr Greenspan was even more downbeat than his recent recounting.
Alan Greenspan, former Federal Reserve chief, warned today on the risks US social programmes – Medicare, Medicaid and Social Security – pose to the US’s ability to finance its deficits in testimony prepared for the Senate Committee on Homeland Security.
For more than two centuries, we have been able to hold the level of U.S. federal debt to well below our long-term capacity to borrow.
But for the next decade or two, on some reasonable sets of assumptions, our borrowing cushion shrinks significantly, threatening to test our capacity to raise funds to finance unprecedented deficits.
The challenge to contain this threat is more urgent than at any time in our history, in part because of today’s limited flexibility of adjustment, especially of entitlement spending whose constituencies are well entrenched.
“Well run” emerging economies will be encouraged to hold less in foreign reserves with the IMF acting as a giant insurer, under a new proposal. Unemployment is set to break through 10 per cent in the US, and stay there for quite some time