A lot of hot air has poured forth over the new appointments at the Bank of England and the Federal Reserve Bank, and it has not come from Mark Carney or Janet Yellen. It has come from the press and economic commentators.
Why do we have to conclude that Carney has egg all over his face?
Carney has been in the job longer, so let’s take the Bank of England Governor first. The Bank quite rightly moved towards greater transparency in its thinking during the reign of his predecessor, Lord King. It was far better for the economy and business in general to be warned of impending changes to interest rates in advance rather than have it sprung on an unsuspecting community.
Last August Mark Carney widened that to include confirmation that the next interest rate rise would be upwards plus taking a first step towards giving a clearer indication of the factors that would affect the timing of the decision. He indicated that the Bank would not consider raising its base rate from the artificially low level of 0.5% until employment fell to 7%.
He did not say, as commentators are trying to make out, that a rise in interest rates would immediately and automatically follow 7% unemployment. Where he really was wide of the mark was in suggesting that unemployment would not fall to that level until early 2016. As it happens, the mark has been reached two years early.
Carney has now issued further clarification by revealing the other indicators that will affect the decision, such as wages, productivity and the output gap between actual and potential production. He also pointed out that when rates rose they would do so only gradually. Thus the Bank will avoid choking off a recovery that is still weak and still too dependent on increased household spending.
What’s the problem with that? Why do we have to conclude that Carney has egg all over his face? Why does so eminent a commentator as Robert Peston at the BBC think that “forward guidance, in the form it was sold just a few months ago, is in the dustbin of monetary history”.
Rubbish. While I am a little sceptical about Carney’s claim that forward guidance has been an important factor is securing economic recovery, it has probably helped a bit. The Bank’s forecast that the UK economy will grow by 3.4% this year – compared with an earlier forecast of 2.8%) will be much nearer the mark than his irrelevant remarks about when unemployment would reach 7%.
If Carney was mocked unfairly for what he said, Janet Yellen is under fire for not providing exciting headlines. Good for her.
Her message as Fed chairman was continuity of policy, with more gradual tapering of the Fed’s asset purchasing scheme.
Equally welcome was the decision by the Republican-controlled House of Representatives to raise the US government’s debt ceiling without demanding any conditions. Thus two uncertainties were removed in one day.
Stock markets have stabilised since the sharp falls at the end of January. The removal of economic uncertainty will help them to recover further.
Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice.
