The key question at the heart of the revelation of the new framework for the implementation of monetary policy is whether it constitutes a loosening of monetary policy, relative to what was envisaged before.
It seems inconceivable that there could have been a majority for a loosening of monetary policy: i) such a majority did not exist before Carney’s arrival, ii) the data firmed substantially since that point. To justify a loosening, MPC members would surely have had to put aside their obligation to vote individually, in favour of another objective to smooth the succession of the new Governor, perhaps worried that by not doing the credibility of his leadership, and so the MPC as a whole, would be threatened.
When asked at the Press Conference by Faisal Islam of Channel 4 news to clarify whether or not forward guidance was a loosening of policy, or just a clarification, although Carney chose to point out that it was primarily the latter, in doing this he emphasised that by so doing the existing stimulus would be made ‘more effective’. Most people would take that to mean ‘more powerful’. A stimulus of the same size, but which had the same effect as more stimulus of the old kind (applied without forward guidance). Hence it seems Carney at least expects the new framework to exert more stimulus, and given the convention that the Governor confines himself to speaking for the majority at the Press Conference, one would presume that the other MPC members also think this. But if that’s the case, how does one reconcile those MPC members’ previous votes. What has happened since those votes to convince them that they needed to make the stimulus they voted for previously ‘more effective’, ie ‘more powerful’?
[Added]: Moreover, later on Carney observed that the new forward guidance did not constitute a ‘change in the reaction function’. How does that square with previous MPC votes? What news could have prompted MPC members, following a given reaction function, to wish for more stimulus (a ‘more effective’ existing stimulus)? This latter comment is pretty hard to read. It implies, taken literally, that MPC members have been articulating their decisions about rates in terms of this forward guidance privately, or perhaps inside their heads, and have simply chosen now to disclose it. Surely that cannot be what he meant. But if he did not mean that, (which is what most people who know what reaction function means would have taken him to mean), what did he mean?
[Added]: That Carney had to be pushed on this key question, and that he wasn’t entirely clear about it in his answer, is unfortunate. One presumes that this comparison (between the overall stance of policy before and after forward guidance) has been discussed on the Committee, and that there is an answer. In which case, why was this not the lead message today? It’s ironic that this was ommitted, since today was meant to be about launching a new, more transparent era for monetary policy implementation.
The next UK MPC minutes are going to make for interesting reading!