The most newsy point from NY Fed president William Dudley’s speech today was his call for a change in exit strategy, urging the central bank to reinvest in its mortgage portfolio. But there was a lot more going on in the speech: Mr Dudley put a dovish spin on the Fed’s inflation target. He said bank regulation may be driving down neutral interest rates, and he put markets on notice that how they price bonds will decide how the Fed changes interest rates.
(1) Inflation is coming
Mr Dudley’s tone on inflation was different to the isn’t-it-worringly-low type of remarks that Fed officials have tended to make recently. Instead, he expects inflation to head upwards, and seemed to be testing arguments for why Fed policy should not react.
“With respect to the outlook for prices, I think that inflation will drift upwards over the next year, getting closer to the FOMC’s 2 percent objective for the personal consumption expenditure deflator . . . That said, I see little prospect of inflation climbing sharply over the next year or two. There still are considerable margins of excess capacity available in the economy—especially in the labor market—that should moderate price pressures.”
This table is the Fed’s response to researchers who say that only short-term unemployment puts downward pressure on inflation. It comes from a newly published research paper by Michael Kiley, a senior economist on the Fed staff. Read more
For the last three years, there has been no breakfast for journalists on the opening day of Jackson Hole, while we write up a dramatic, market-moving speech by Ben Bernanke. It’s a more sedate start this year with a thoroughly wonkish paper by Stanford’s Robert Hall.
There is not much new in it on policy. It starts with a fairly straightforward rundown on why the economy got into such a mess when interest rates hit zero after the financial crisis, and it ends by agreeing with last year’s paper by Michael Woodford on what to do with monetary policy (QE doesn’t work, you need commitments about future policy, not just guidance).
The meat of Mr Hall’s paper is about why inflation did not fall much after the crisis despite high levels of unemployment. This has been a surprise during the last few years: unemployment has not driven down wages in a way that led to deflation. Read more
One of the few occasions when I’ve used a ruler since leaving school is during the Bank of England’s inflation report press conferences. I’m not alone — for years a ruler has been an essential tool for those trying to fathom what monetary policy makers thought was going to happen to growth and inflation in the months and years ahead.
The BoE’s practice of waiting a week between releasing its quarterly fan charts for growth and inflation and the data underlying them left bank-watchers with little choice but to dig out the ruler to work out where the MPC thought growth would be in, say, 2014. As Chris Giles commented here, there were several problems with this approach.
Now, thanks to the Stockton Review, reporters need no longer remember their rulers (hat tip to George Buckley at Deutsche Bank for the headline of this post). Read more
The Bank of Japan delivered a statement of intent on Thursday. Under its new governor, Haruhiko Kuroda, the central bank intends to eliminate the persistent deflation of the past 15 years within a two-year horizon. The FT news story provides the main details, save to say that in planning to double the monetary base (notes and coins, plus electronic money created by the BoJ) by the end of 2014, Mr Kuroda means business. Central bank communication does not often use words such as “massive”. Here are five answers to the big questions. Read more
Mark Carney, the incoming governor of the Bank of England, was grilled by MPs and his ECB counterpart Mario Draghi faced awkward questions. By Tom Burgis, Ben Fenton and Lina Saigol in London with contributions from FT correspondents. All times are GMT.
Mark Carney. Getty Images
Mark Carney, the next governor of the Bank of England, has suggested he will act much more aggressively to revive the UK economy when he takes charge next summer, including dumping the BoE’s much-vaunted inflation target if growth fails to pick up.
In a clear break with the views of the BoE’s current senior management, Mr Carney, now governor of the Bank of Canada, said on Tuesday that central banks should consider more radical measures – such as commitments to keep rates on hold for an extended period of time and numerical targets for unemployment – when rates are near zero. Read more
The Bank of England’s forecasting record, both for inflation and growth, has in recent years been woeful.
But would the Bank have done any better if its officials’ pay depended on the forecasts’ accuracy?
According to a paper out today from the Centre for Economic Policy Research, the answer is yes.
Because monetary policy acts with a lag, it has to rely on forecasts.
However, as the Bank of England’s attempts at prediction have illustrated, central banks’ forecasts, and indeed those of most economists, tend to be pretty dire.
This is what Svante Öberg, first deputy governor of Sweden’s Riksbank, refers to in a speech out today as the “Catch-22 of monetary policy.” So what’s a central banker to do? Read more
An important part of the Fed’s outlook when it made its forecast of low interest rates through to mid-2013 in August, and launched Operation Twist in September, was that it expected inflation to fall back as the temporary effects of an oil shock and the tsunami disaster in Japan faded away.
But the FOMC’s November projections show a wide dispersion of views on whether that will actually happen. The central tendency for headline inflation in 2012 is from 1.4-2 per cent and the central tendency for core is from 1.5-2 per cent. Three FOMC members must be higher and three members must be lower than even that range. Read more
With UK inflation slowing to 5 per cent in October, most believe price pressures are now past their peak.
But few agree on how fast inflation will fall towards the Bank’s 2 per cent target. Read more
It’s interesting to note how much of decline in the Cleveland Fed’s measure of inflation expectations came before the latest round of market turmoil.
The first six months of 2011 have been most uncomfortable for the Bank of England. The combination of overshooting of inflation and weakness of growth really brings out the inner-hawks and inner-doves on the Monetary Policy Committee.
Do they react to the rise in price pressures seeming to come from weakness in supply? Do they assume price rises are temporary and respond to what they see as a shortfall in demand? Or do they sit on the fence?
The fence sitters have won the day so far on the MPC. But today’s inflation figures give some ammunition to the doves. The fall in CPI inflation to 4.2 per cent in June (from 4.5 per cent) ensures there was no overshoot in inflation in the second quarter relative to the Bank’s may inflation report.
Much of inflation’s still high level reflects price rises quite a long time ago, so it makes sense to look (below) at a chart of annualised quarter-on-quarter inflation with rudimentary seasonal ajustment to see whether the inflation scare is past.
I drew this chart so blame me if it makes no sense, but it also gives some succour to doves. Read more
Financial markets think Bank of England meetings on monetary policy will be a bore for almost another year. The minutes last week persuaded investors that the Monetary Policy Committee was unlikely to raise interest rates until mid 2012.
Economists are now following in investors’ footsteps with Barclays Capital becoming the latest group of forecasters to push back their forecast of a rate rise from November 2011 to May 2012, arguing that “policy [is] paralysed by domestic double dip” fears.
As I argued in the Financial Times last week, investors have got ahead of themselves a little and the balance on the MPC is rather more delicate. It could easily tip towards a rate increase, particularly if Charlie Bean swung into that camp. Based on their recent words, here is my guide to the MPC members’ views, from the most dovish to the most hawkish.
As you can see, there is quite a delicate balance on the MPC. It could easily tip 5-4 to a rate rise. Getting a majority in favour of QE2 appears much more difficult at present. Read more
All eyes were on the Bank of England minutes of the June Monetary Policy Committee to see whether the replacement of Andrew Sentance with Ben Broadbent would change the balance on the Committee. It did.
Mr Broadbent voted with the majority not to tighten monetary policy, removing one hawkish voice. The Committee is now broadly split 7-2 against tighter monetary policy. Mr Broadbent’s vote was the first dovish tilt apparent in the minutes. Compared with the harsh Mr Sentance, who voted vehemently for rate rises every month most recently seeking a 0.5 percentage point rise, Mr Broadbent is very cuddly indeed.
The second dovish tilt came in paragraph 25. Read more
It appears from the chart that UK inflation held steady in May, although at much too high a level.
Unfortunately, that is a mis-reading of the data since the rise in CPI inflation in April to 4.5 per cent was a statistical blip caused by the timing of Easter. A constant rate indicates another underlying increase in the rate of growth of the price level.
How worried should monetary policy makers be? The interesting fact, noted by Simon Hayes of Barclays Capital this morning is that Monetary Policy Makers, regardless of whether they are hawks or doves, say not very worried at all. Read more
Jean-Claude Trichet spoke at the LSE on Monday afternoon.
Much of what he said was a combination of a couple of speeches he gave last week, the central message being that the eurozone needs to monitor member countries’ fiscal and macroeconomic policies and competitiveness more closely, and that there needs to be a sharper stick with which to beat countries that fail to behave themselves. Read more
The UK’s economic performance over the past year is no surprise. When you tighten fiscal policy significantly after a major financial crisis, both history and mainstream economics would tell you to expect what we have now : no growth in broad money or credit, persistently high interest spreads for small businesses and households, flat or contracting private consumption and retail sales, a dearth of construction and declining real wages – all only partially offset by some expansion in exports. In such a situation, you should expect little domestically generated inflation, and that is also just what the UK has.