I couldn’t resist linking back to this article by Andrew Sentance, arch hawk and ex-MPC member, in the FT. That was 2012, when, as he wrote, oil was ‘picking up again’, and back to about $125 a barrel. How do you think he was suggesting policymakers respond to that? Of course, by raising interest rates, to ensure that expectations were anchored, and the oil price did not feed through into a broad-based rise in inflation.
“In my view, a policy of “leaning against the wind” of high energy and commodity prices – by seeking to influence the exchange rate and expectations of price increases – is more likely to be successful in anchoring inflation expectations and sustaining central bank credibility.”
Now, with oil prices falling, Andrew takes a different view. This is despite the fact that – unlike in the tightening scenario – we don’t have a tried and tested way to loosen. QE may not be so effective as claimed. And further QE may anyway be a net drag. Forward guidance was botched last time, and may not offer much now, with the yield curve low and flat.
This time, in the Telegraph, we have:
“[economists are] worrying that very low inflation may be signalling another economic problem – deflation and persistently falling prices. Instead of providing economic relief, deflation is seen as a threat to an economic recovery that now seems to be well established.
In my view, these fears are misplaced. If inflation falls further – as appears likely with oil prices dropping to around $60 per barrel – we should welcome it. And if this leads to a short period of falling prices, that too would be welcome. It is a mistake to associate a temporary period of moderately falling prices with a damaging and prolonged deflation.”
For some reason, the expectations mechanism doesn’t work on the way down, even though it warrants tightening on the way up. And as oil prices fall, we get text stressing the heartening real income effect. But nothing about the worrying drop in real incomes on the way up back in 2012.
One way of reconciling this, I suppose, might be for the Hawk to recant his old talk, observing that, contrary to his worries, despite the MPC not listening to him, there was no unhinging of expectations as headline inflation was allowed to surge. So that would justify not loosening now. That would be consistent. (I wouldn’t agree with it, of course, because the zero bound gets in the way of the argument by symmetry.)
I get a lot out of Andrew’s writing and speaking, since his head is in such a different place from establishment macro, and it is therefore constantly challenging, refusing to obey by the econ equivalent of political correctness. But there are occaisons like this when you wonder if the hawk talks always about tightening [or at least not loosening] whatever is going on in the economy.