Yesterday [24 June] Mark Carney’s doveish remarks at Treasury Committee – particularly the emphasis on weak nominal wage growth – caused the yield curve and Sterling to fall. This was but 12 days since his Mansion House speech, where, surely knowing the effect his words would have, he pointed out that rates could rise sooner than expected, causing the yield curve to tighten and Sterling to rise.
In principle, you could imagine a perfectly successful monetary policy communication strategy leading to just this sequence of events. Markets may not necessarily share the insights or information the Monetary Policy Committee have about how news hitting the economy will affect inflation and real activity, and thus MPC’s future policy settings. Sometimes they may understate future interest rate rises, and need correcting, and sometimes they may overstate the rise. But it’s stretching it to see these latest two interventions by Carney in this way. From the outside, it looks much more like MC tried to talk the yield curve up, realised that he had overdone it, and then felt obliged to reverse course.
Carney’s latest remarks included text that tries to resist this interpretation. Some of them were designed to emphasise the continuity in communication: the gradual nature of rate rises, and their likely end point being lower than recent historical resting points for Bank Rate. And he also noted that Mansion House was his speech and therefore should have been read, and should be read, as his view. The code here is ‘you were the ones at fault for thinking my Mansion House speech signalled a sooner rate rise than was priced into the market’. Although we are mistaken for conflicting reasons. The first reason we were mistaken is that there wasn’t much difference in what was being said from one speech to another. The second reason is that he was giving his own view, not that of the Committee, so we put too much weight on those (supposedly) unchanging words.
I was left wondering quite what he meant by his own view. His own view about what should happen, if all Committee members saw the world the way he did? Or his own view about what would happen, given the insights he has about the other MPC members’ views and what would persuade them as the recovery progresses? It’s to be applauded that the Governor stresses that he does have a view and wields his vote that way. In eras past it was thought – on both sides of the Atlantic – to be damaging for the Chair to be seen to be in the minority. Carney’s predecessor, Mervyn King, solemnly allowed himself to be seen in the minority, emphasising that the Chair’s role as facilitator, and Chief Executive of the Bank, can legitimately be separated from the role as individual with expertise in monetary policy. Carney’s words reassure us that this desirable state of affairs will continue. However, it’s also been the custom that the Governor, in leading events like the Inflation Report Press conference, speaks to the collective view of policy and the economy (when differences are small enough to allow one to be articulated). So it’s natural to presume that this is what is going on when he gives other set piece speeches like one at Mansion House. So, now, we have a new protocol, that Carney’s speeches articulate his views. Except, presumably, when they don’t. Because one has to hope that someone does continue the practice of trying to recapitulate the collective narrative of policy, or it will become harder to understand.
This see-saw in verbal policy signalling would be unfortunate enough were it not taking place in an era when the MPC were still supposedly bound by a new strategy framework of Forward Guidance. This has already had two incarnations and many unfortunate words spilled by Carney about it. [Recall the ‘no more stimulus’ debacle, also at Treasury Committee, whose lack of additional stimulus ‘secured’ the recovery]. Clear attempts to talk the yield curve around are bound to reduce the probability that outsiders put on the latest incarnation amounting to anything concretely different from normal monetary policymaking.
The last two Carney interventions make me wonder if the Bank of England is not occupying an uncomfortable half-way house of transparency. Carney made a bold break with the fiction that MPC don’t take a view on future interest rates, which is to be applauded. Monetary policy is inevitably about expectations-management, (especially when your current instrument is up against its floor), and Carney’s talking recognises this fact. But the end-point of such thinking is that the Bank should move to publishing regular interest rate forecasts consistent with its own forecast of inflation and output. With such a forecast out in the open, the ambiguity of remarks like ‘sooner than expected’ [Mansion House] or Haldane’s front-foot/back-foot cricket metaphor will be gone. Yield-curve talking will then be about explaining why the MPC’s forecast might have changed [economic news, a change in MPC reaction function?], or confronting an apparent discord between what MPC thinks it will do, and what markets think MPC will do. On top of publishing such a forecast, the MPC should reveal how it models its own behaviour in the forecast – its description of its own reactions to news. And discuss any more nuanced features of how it processes news that can’t be expressed in such a reaction function. Having done so, changes in interest rate forecasts can be compared to this description of what it does. ‘You see: we said we’d respond like this if that happened, and we have done just that.’
If the MPC already had an interest rate forecast out there, none of the problems with Carney’s last two yield-curve chats would have occurred. It would have been obvious whether he was articulating his own view or not. And the fact of the forecast being there would have made it impossible for him to say ambiguous things like ‘sooner than expected’. Other meanings like ‘sooner than MPC previously expected’ / ‘sooner than I previously expected’ / ‘sooner than markets expect, despite having seen MPC’s forecast for interest rates’ would be sifted, by a speechwriter confronted with the undeniable fact of there being an agreed, collective forecast out there against which any talking has to be measured. An open interest rate forecast would discipline yield-curve talking to adhere to the same standards of quantitative clarity inherent in that forecast. It would discipline such talking in other ways too. The Bank would not publish a forecast lightly. Each one will be deliberated on in minute detail. Anyone seeking to offer an update, or establish a quantified, alternative interest rate forecast, would be pressured to explain themselves carefully with reference to the already public benchmark.
Right now, it’s easy to talk about future rates, because with a bit of careful back-tracking, if you see that it didn’t go well, you can pretend that you didn’t say anything out of the ordinary. In that sense, yield curve talking is currently cheap, but with an interest rate forecast out there it would be more expensive.