Weale and McCafferty: the mystery of persistent hawk and doveishness

At the next Monetary Policy Committee vote, most are expecting Martin Weale and Ian McCafferty to vote for a 0.25pp rise in interest rates.  They have been voting for just this since August.

The curious thing, if you look at this through the lens of modern empirical macro, is that, if their vote stays this way, they will have kept that constant distance between their own preferred vote and the MPC’s preferred stance.  This is curious because, if you were to take a typical macro model and perturb it with an unwanted drop in interest rates, say by 0.25pp for 6 months, you would get quite a pronounced increase in inflation, and one that, once rates could be set freely again, would prompt you to tighten sharply to avoid inflation spiralling out of control.

And this is one way of looking at what is going on from the perspective of Weale and McCafferty, the mystery MPC hawks.  Each month, they choose their preferred interest rate and each month the majority confound them and set rates 0.25pp lower than they think appropriate, for six straight meetings.  [Six assuming they vote as I predict at the January MPC meeting].  So the puzzle is why each month they come back with the same suggested 0.25pp rise.  Because, after the first month’s mistaken interest rate vote [from the perspective of W&M], they ought to have put their heads together and said:  hang on, not only do we need rates 0.25pp tighter on account of us seeing the recovery’s heat for what it is, unlike our mistaken colleagues, but we need to tighten more in response to the interest rate mistake that our colleagues have injected.

An analogy.  Imagine MPC collectively steering a mini-bus around a corner.  W&M see the corner looming and vote for a slight tweak of the steering-wheel.  The others, who W&M must assume have not recently had their driving spectacle prescription updated, vote for driving straight ahead.  A few seconds later, W&M, fearing disaster, vote for a full-on yank of the wheel to keep the minibus on track……

There are three ways of reconciling W&M’s persistent, finely calibrated hawkery with policymaking that looks like how policymaking should be done.  One is that these kind of macro models have the macro-economy completely wrong.  Many would plump for that reason.  But these models are just the ones that W&M are using at the BoE to forecast inflation and inform their vote, and we don’t hear anything from them about how they see the world operating differently.

A second reason is that as news about the economy unfolds, it reveals that the economy is just a little bit cooler than W&M thought, enough to offset each month’s interest rate mistake that they would otherwise be correcting.  However, we also don’t hear anything from them about how they are slowly revising their view toward that of the majority.

A third reason is that, although required tightening for W&M does mount up each month, in just the way described above, W&M’s vote for a constant 0.25pp rise represents but the first step along a tightening plan that becomes more pronounced in its entirety as each month winds forward.  Yet, it would seem odd if this was the reason, because neither W&M indicate that this is what they would plan for rates.  It’s possible that they have conceived of these ever more aggressive plans, so the constant 0.25pp vote is coherent, but that they feel constrained by the convention of not talking explicitly about future interest rates.  But this would be somewhat odd too in these days where ‘forward guidance’ has made such talk permissible.

Another way to explain the W&M constant hawkery is that their vote is tactical.  Although they would prefer an ever more aggressive tightening, as the monetary policy mistake mounts up, they hope to convince some of the more hawkish doves to vote their way.  Better a compromise tightening than none at all, they might think.  In which case, as the monetary policy mistakes mount up, offering a mere 0.25pp rise [and being turned down by the hawkish doves] must get ever more miserable for them.  The first time they offer it, they are stating their preferred vote.  The second time, the 0.25pp rise is perhaps a little lower than they might want.  The third time, this 0.25pp rise looks meagre relative to the tightening required to make up for lost time.  And so on.  Such tactics might actually be in the realpolitik of MPC strategy.  But if this is what is going on, it would be entirely underhand.  The W&M votes have been defended as being just what they would wish for.

It’s somewhat unfair to pick on Weale and McCafferty in this way, as they are not the only MPC dissidents to behave like this.  Danny Blanchflower’s votes looked the same, only on the doveish side of MPC’s.  Andrew Sentance’s hawkery was similarly persistent.  And you can find the same behaviour if you go back to the MPC wars in the late 1990s/early 2000s when Messrs Wadhwani, Julius and Allsopp were heralding the ‘New Economy’, and arguing for lower interest rates [and signalling forecast dissent in the iconic ‘Table 6b’].

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5 Responses to Weale and McCafferty: the mystery of persistent hawk and doveishness

  1. nick says:

    At least they try to put some pressure into the low rate BTL investing and stop the crazy housing ponzi scheme

  2. Nick Rowe says:

    All of us money/macroeconomists should put our “votes” on public record. Mine are on record for the last 11 years. I haven’t checked to see if I have a hawkish or dovish bias. But I am proud of this one in January 2009, where I “cut” to 0.25% before all the others did.

  3. Nick Rowe says:

    I’m trying to remember if the UK has anything like our CD Howe Monetary Policy Council?

    Half academic economists, and half Bay Street economists from banks and things, a dozen in all. We meet 8 times a year (most of us phoning in), a couple of days before the Bank of Canada’s interest rate announcement. We argue for an hour, and then make 4 recommendations: our recommendation for the overnight rate at the next meeting; plus 3 other forecasts of our own future recommendations, conditional on our first recommendation being adopted. (That’s to handle the point you raise above in your third reason). All taking as given the 2% inflation target (whether or not we agree with that target).

    It imposes a very good discipline on us. We can’t just BS about the BoC getting it wrong, if we made the same mistake ourselves.

    And the BoC seems to be very supportive of us doing it. Maybe because they want a second opinion, or maybe as cover in case they miss the target, because they can say that we “missed” it too.

    • toby_n says:

      There is a ‘shadow MPC’, but until I read your comment I had forgotten about it. Its membership is interesting, and it’s minutes appear long – preferring to be a list of individual views rather than a collective statement. Having just read Tony’s blog I can see that he would hate hate hate it. It was voting for hikes (each time accepting that they had not been delivered, so starting again from scratch) for a good long while until early this year when it decided that things were, after all, fine and dandy. But since September it has reinstated its persistent dissent from the real MPC. http://www.iea.org.uk/smpc/minutes

  4. A P Webster says:

    I think the key point is not the actual level that Weale and McCafferty think rates should be, merely that they think the process of tightening should have begun – a vote for an increase of 25bps is the ‘acceptable’ signal for this.

    From the point of view of a non-economist, the likelihood that anyone on the MPC can accurately assess the ‘correct’ interest rate (especially when the most likely change would represent a 50% increase) seems minuscule. As with almost all of the MPC’s actions since 2009 or so, it’s all about signalling.

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