Adam Posen: Why I changed my vote

Adam Posen

137693243 300x200 Adam Posen: Why I changed my voteSo allow me to explain my vote for no change to policy at the April Monetary Policy Committee meeting.  This seems to have surprised people, but it really should not have.  I have been saying publicly since the February meeting that there is very little distance between the Committee’s modal forecast and my own forecast – in contrast to last summer before we undertook additional asset purchases.  This means that I believe the risks are largely balanced around inflation being below but close to target over the forecast horizon, starting at the end of this year, and that GDP growth will continue to improve from here through 2013, as a result of the additional quantitative easing the MPC rightly undertook since October 2011.  (The welcome additional monetary easing by the ECB and Federal Reserve, in line with what I called for last October, also has had a beneficial effect on the UK economy and the world).

I never was an automatic vote for more QE – my votes are always based on my forecast.  By definition, if quantitative easing has the desired effect to loosen monetary conditions, and I believe it does, there has to be some amount that is enough to return inflation to our medium-term target for any set of economic conditions.  Given my and the Committee’s current forecast, we have to be close to that right amount, that correct setting of policy, on current data.  We cannot know precisely the right amount to do when setting any kind of monetary policy, but the uncertainty is greater with QE than with interest rate cuts in normal times, as I noted in my first speech as an MPC member in October 2009.  That is why I said several times in public since our February meeting, including before the Treasury Select Committee, that the additional £25 billion of asset purchases being discussed was not a big deal – especially compared to how far we’ve come since September 2011, from when the MPC voted 8-1 against further easing and was seen at risk of raising rates in the near-term, to having purchased an additional £125 billion in gilts.

The latest data convinced me that for now an additional £25 billion could be unnecessary.  By the latest data, I do not mean one month’s outturn on the headline CPI, however disappointing – neither I nor anyone else on the MPC will set our forecast based on one data point subject to so much monthly variation.  What I mean is our making sense of the mass of the range of indicators from business surveys and latest labor market data (though again, not to make too much of one data point) that underlying growth is picking up – that is, that QE and the British economy are responding as I expected it would – with the mixed indicators on inflation.  The MPC has to consider in making its forecast not only the latest CPI, but also the steadily low wage growth and the anchored inflation expectations.

In terms of accountability for my own record, I stand by what I said in March 2011 – if I am basically wrong about the forecast, I will not seek reappointment.  When I forecast at that time 1.5% inflation and trending down for summer 2012, that was when some MPC members were voting to tighten policy and no one else was voting for additional ease.  Of course, the inflation forecast is higher now than it was then precisely because rightly we did more QE.  What is more challenging to my analysis, and more concerning for the economy, is that core inflation has plateaued for the last three months rather than trending down.

But I have been right in forecasting for the UK that over the last two years consumption growth would be weak, that wage growth would be anemic, that short-run inflation expectations would come down, that long-run inflation expectations would remain anchored, that small and medium size firms would need help to access credit, and that additional QE would stimulate the economy without either sparking an inflationary spiral or weakening Sterling.  That is consistent with a mainstream macroeconomic analysis of the British economy given the situation.  Even a couple of months of sticky core inflation numbers, and certainly just one datapoint on headline inflation, do not falsify that analysis.  I expect that the coming months of data will demonstrate the validity of this analysis.  So neither the MPC nor markets should overreact to one month’s number, nor even to one vote.  We will make a forecast that makes best sense of current conditions, and vote accordingly, whether that is for more QE or not.

  • wildejamey

     Utter rubbish. Try studying economics before simply repeating the simple-minded garbage spouted by right-wing twits and newspapers. Economics is neither moral nor immoral, any more than money is. There is no fixed store of value held in a bank, doled out according to how virtuous you are in doing your work or paying your taxes or saving for a rainy day . National economies do NOT operate like your ISA savings account. The BofE is simply an instrument of the flawed capitalist system which will always ensure that value is transferred to the owners of capital, the more you own the more you get. Conversely, if you are a wage earner or own nothing you can expect to be systematically robbed of the fruits of your labour. That’s the system. Wise up. That’s the source of the immorality, unpalatable as it may be for those who have been brainwashed into buying into it.

  • bbbblllooo

    … with freshly printed money.

  • GunterLetwinov

    Don’t know who you are, mate. Don’t care what you think. Why do you feel that you have to justify yourself to those who couldn’t tell the difference between you and a plank.

  • kawasakiman

     With printed money….Spending it, doesn’t change that.

  • frances smith

    i found on a visit to the telegraph website a link to a youtube video of milton friedman making a speech saying that inflation was always caused by increasing money suppply, i am not absolutely certain i would make such an absolute link myself, as i suspect as an increase in money supply may be partly opportunism on the part of lenders who realise that people are unable to pay their bills.

    however the reality is that only a fool would not realise that demand is an essential part of growth, and that to create unnecessarily high inflation, and create greater distress for people on low incomes, would have a downward impact on growth.

    quantatitive easing has had a negative impact on growth, not a positive one, the obr admitted that, in one of its reports when it admitted that high commodity prices are undermining growth.

    handing over control of monetary policy to a collection of unaccountable technocratic economists, was the biggest ,mistake labour ever made.

    they have paid for it by losing an election, you will too, one day, if only by the foolish inhumane arrogance of your profession being fully exposed.

  • Jonny Jones

    Er… it’s creating money to buy the debt that you owe someone else.

    If they were buying gold with it, you’d probably say “oh my God, you’re printing money!”.

    So seems a bit strange for you to look more favourably on creating money to buy back your own debt – and if they ‘retire’ the bonds, to effectively pay it off.

    “Purchasing assets” my ample backside!

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