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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.

  • MrMcHenry

    QE is counter productive and immoral. They talk of pumping money (which we haven’t got) into the economy. Exactly who gets this money? Is it wealthy bankers or ordinary people? In any event the arrival of extra money reduces the value of the money that’s already there which means everyone with any is worse off.

  • Guest

    Not one single word about fiscal “austerity”.  UK fiscal “austerity” has put such downward
    pressure on spending that inflation… has remained above target for most of the period the Coalition has been in office, even on the CPI-CT measure which ignores VAT changes.

    Thus on the macroeconomic indicator of choice for the Keynesians, the CPI rate, fiscal austerity has not been a drag on aggregate demand, because demand growth has been TOO FAST for domestic producers to keep up.   If we have low real output growth, and CPI remains above target, the necessary solution is supply side reform to improve the supply capacity of the UK economy.

    The call for more “fiscal stimulus” has also been demonstrably incorrect.  We need a more competitive free market economy, not one where even more spending is directed by the central planners on windmills and duck houses.

  • The Ayatollah Buggeri

    He hasn’t “changed” his position at all: he still supports the £385bn of QE that he voted to create staying out there.  Changing his position would mean voting to reverse the existing QE, i.e. sell all the bonds that were bought with the newly created money and then destroy the proceeds, thereby reducing the total quantity of GBP in circulation to pre-QE levels.

  • tom61

    If he really wanted to get money into the economy rather than “give” QE money to the Banks to speculate with, if they buried it around the country for people to find, it would have had a real beneficial effect.
    What we got instead is more inflation, wage freezes (lower wages) and bigger bankers bonuses on the back of their speculation. These people who profess to know what is going to happen to the economy whilst being unable to control outside influences from volcanoes, tsunamis, to even an additional bank holiday are every bit as delusional as the politicians they control.
    He has more chance of picking the lottery numbers than any meaningful economic figures, but then again he doesn’t need to.

  • ShaunRichards

    There are elements of this statement that are simply untrue. For example let us consider this bit.

    “there has to be some amount that is enough to return inflation to our medium-term target for any set of economic conditions.”

    Throughout the period that Adam Posen has voted for more Quantitative Easing inflation has been above its target and sometimes way above it. If we look at his record we see that when the annual rate of CPI inflation was 5.2% back last September yet at the very next meeting he voted for an increase in Quantitative Easing of £75 billion. I will leave him to explain how you hit a target with expansionary measures from above it!

    Using forecasts does not help either as the Bank of England has a shocking record in this regard and has consistently underestimated what it will be. If you look at its medium-term forecast in February 2010 for now inflation would be just over 1%.

    The problem for the claim that raising inflation using QE  has been a success -please try that with those on fixed incomes Adam- is that we have got so little growth from it. Indeed this is from my Notayesmanseconomics blog from today.

    “Comment

    In these minutes was an unintended critique of the MPC’s policy of slashing interest-rates to 0.5% and spending £315 billion on Quantitative Easing.

    downside news on the near-term path of GDP likely to be published by the ONS and by the upside news on the near-term path for inflation.
    You see output keeps disappointing and inflation keeps being higher than they expect. This is the real story of the QE era where we do not get the promised increases in output but we do get inflation at a rate higher than it should be considering how weak our recovery from the credit crunch has been.”

    Frankly for Adam Posen to claim that he has been right about inflation really does take the biscuit.

  • thursfield

    If the oil price was allowed to reflect actual supply and demand, instead of the gambling casino in the futures market, there is a good chance it would come down considerably.

    Unfortunately, western governments foreign policies of attacking independent oil producers such as Iraq, Libya, Syria and Iran have had disastrous consequences in artificially reducing supply.  These politicians and the international bankers behind them, need to be held personally responsible for their appalling actions in destroying so many people’s livelihoods.

  • kawasakiman

    Before we start, lets just get it straight shall we.

    Just because some dodgy politician come PR man, ‘makes up’ a new name, it doesn’t change anything. ‘Quantitive Easing’, is still ‘printing money because you are bankrupt’.

  • 12758

    Unfortunately, western governments foreign policies of attacking independent oil producers such as Iraq, Libya, Syria and Iran have had disastrous consequences in artificially reducing supply.

    Iran and Iraq no question. Libya some limited effect. Syria not significant (which is probably why we’ve seen no military intervention or threat of intervention).

    Country – oil production and military intervention status.
    Iran  4,172,000 bbl/day threat of military intervention
    Kuwait  2,494,000 bbl/day military intervention
    Venezuela  2,472,000 bbl/day attempted military coup by US
    Iraq  2,399,000 bbl/day military intervention
    Libya  1,790,000 bbl/day military intervention (eventually)

    Egypt  680,500 bbl/day no military intervention
    Syria  400,400 bbl/day no military intervention
    Tunisia  91,380 bbl/day no military intervention

  • wildejamey

    On the inflation side, the problem is commodity inflation. On the growth side there is weak demand due to fiscal contraction and fear by the population of its effects i.e. job losses. It’s true that BofE action alone is not enough. That is like trying to improve the economy with one hand tied behind one’s back. Whatever monetary easing the BofE provides, this will not on its own resolve the stagnation due to lack of demand. The blame for this lies at the door of the government. Although more enlightened than most of the MPC, I suspect that Posen will be wrong on inflation (unless commodity inflation declines, which may be touch and go depending on external factors)and growth.

  • wildejamey

    Neither does your ignorance of economics change the reality. Quantitive Easing is NOT printing money. It is purchasing assets.


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