Bank of England Governor Andrew Bailey fell back on a bit of cockney slang to defend the Monetary Policy Council’s decision last week to hold off raising rates, saying the panel did not “bottle it,” which apparently is a colorful way of saying they didn’t lose their nerve.
Investors were rattled. They thought Bailey had telegraphed clearly that the Bank would in fact start tightening the screws on monetary policy. Instead, while raising its inflation forecast to 5% by next spring, the UK central bank only said a rate rise would probably be necessary “over coming months.” The Bank left its unchanged at 0.1% instead of raising it as expected to 0.25%.
And the US thought it had problems.
The Federal Reserve came through in line with its and announced as expected it would begin reducing its bond purchases by $15 billion a month from the current $120 billion, and finish tapering by the middle of next year.
Fed Chairman Jerome Powell further softened that gentle blow by saying it was “appropriate to be patient.”
Powell knows a thing or two about patience, since he’s been waiting for weeks to get word about whether President Joe Biden will nominate him for another term as head of the US central bank. Biden said last week that a decision was nigh, and met separately last week with Powell and Lael Brainard, a member of the Fed’s board of governors who could replace Powell or at the very least get one of the central bank’s vice chairmanships.
Monetary Policy: ‘Bottled’ Or ‘Gaslit’?
While Wall Street waits with bated breath for Biden to make up his mind, the rest of the world continues to turn. Norway’s central bank reiterated its intention to raise its policy rate again in December after in September for the first time in two years. The country’s is rebounding strongly and the central bank is planning to raise the rate 25 basis points a quarter until it is at the pre-pandemic 1.5% by the end of next year.
New Zealand’s central bank has also and the has halted quantitative easing as global central banks throttle easy-money policies at different speeds.
The divergence is due to the willingness of some central bank chiefs to jettison the traditional role of monetary policy, which is to ensure price stability, and to prioritize maximum employment—though it is far from clear that this is something monetary policy can achieve.
Powell is the main proponent of this policy, though European Central Bank President Christine Lagarde seems happy to follow his cue. Powell and his disciples argue that the COVID-19 pandemic has created an exceptional situation and that inflation, even as persistent as it has proven to be, is the result of temporary disruptions in supply chains and the labor market.
On questioning, the Fed chairman allowed at his press conference last week that it is “within the realm of possibility” that the central bank’s goal of maximum employment is reached by the second half of next year, paving the way for possible rate increases.
Financial adviser Charlie Farrell accused the Fed in his Denver Post column of gaslighting investors, using the term to mean manipulation of perceptions to challenge the reality someone sees, albeit in this case for the laudable reason of keeping inflation expectations anchored—that is, not to let anticipation of higher prices become a self-fulfilling prophecy.
“The Fed does not have a good history of predicting inflation, and it knows this. The reality is the Fed has little insight into what’s ailing the supply chain and the coincident labor shortage issues.”
So, pick your poison. Has the Bank of England “bottled it,” or is the Fed “gaslighting” you? Or should you just trust these policymakers to look after your best interests. History compels us to be skeptical.