Instrument forecasts for the Fed, HMT but not the BoE

A quick post on a hobby-horse of mine.

Today, the Fed released its economic projections, including the famous ‘dot charts’ where FOMC members project what they think should happen to the Fed Funds Rates.

By contrast, the Bank of England’s Monetary Policy Committee, in its wisdom, feels that it cannot tell us what it forecasts will happen to Bank Rate or Gilts held in the Asset Purchase facility.

Instead, we have to infer what it might do by scrutinising forecasts conditioned on other peoples’ forecasts of what the Bank will do.  [Actually a 15 day moving average of those other people’s forecasts].  Where, inevitably, those other people’s forecasts will be conditioned on a different view of the state of the economy from the Bank’s own view, and, more confusingly still, a different view of what the Bank sees as its reaction function from the Bank’s own view of its own reaction function.

These confusions, and the Bank’s lack of transparency about precisely what its reaction function is, or, similarly, just how it weighs competing inflation and resource utilisation goals at different points in time, make it impossible to reverse engineer what the Bank’s MPC do intend to do with interest rates.

Perhaps because of this, since Mark Carney’s arrival, he has engaged in much verbal communication about the likely timing of the next interest rate change, its sign, and the eventual resting place for interest rates.  From the perspective of outsiders, this communication has been notoriously hard to read;  from Mr Carney’s perspective, that misreading has looked wilful.  Really, such communication problems are inevitable when the forecast is communicated so vaguely in words only.

George Osborne presented the Budget for 2016 today, including projections that embrace forecasts for umpteen of its own fiscal instruments.  It is rather tolerant of the Bank’s bosses at the Treasury, and its overseers on Treasury Select Committee to give the Bank a pass on telling us what it plans to do.  Perhaps someone on TSC might ask at some point what the special advantages of not telling us what MPC will do with interest rates are, and why they outweigh the gains that other bodies think are telling.

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