Bernankeology

Why so much is read into the words of the Fed chairman.

Following Fed chairman Ben Bernanke's speech yesterday, the usual bout of trying to understand quite how much we can read in to his words has begun. Yet unlike the normally perjorative "Kremlinology" – attempting to infer things from the most minuscule turns of phrase – this Bernankeology is understandable and quite useful.

Central bankers have a strange job. They don't actually have many tools at their disposal; largely just the tripartite decision to raise, lower, or maintain interest rates. Yet many of the outcomes they create come, not from actually using this power, but from creating expectations as to their future use.

Suppose Bernanke knows he is likely to raise interest rates in the first quarter of 2013. Even though his actual power is relatively limited, he can create a wide spectrum of outcomes depending on how he announces this. The market reaction will be extremely different if Bernanke says now that he will raise rates in a years time, compared to if he maintains right up until the day that a rate rise would be inappropriate.

But this power to persuade brings with it its own problems. Just like a legislature, a central bank is fundamentally unable to constrain itself; it can make promises, but everyone knows that it is free to break them at any point.

All of this means that every speech Bernanke gives is likely to be very carefully aimed at creating just the right set of expectations. On the one hand, he can't ever gain a reputation for untrustworthiness, so they have to be scrupulously honest; on the other, actually saying what he believes may create the wrong impression.

Last week, Ryan Avent provided a detailed breakdown of exactly what the benefits of Bernankeology can be, focusing on the Fed's "forward guidance" where it hinted that it would keep interest rates low until at least 2013. He writes:

On the one hand, a pure focus on the language of the Fed's statement indicates that rates are likely to remain low through that period based on the state of the economy... On the other hand, the Fed may be hinting that it will be willing to keep rates low through late 2014 even if the trajectory of the economy warrants a rate increase.

In other words, the Fed might be attempting to commit itself to a deviation from its normal policy rules of the sort that might generate more rapid growth and inflation.

The problem the Fed has is that it needs to generate growth, but that growth is likely to come with relatively high inflation, of the sort which Bernanke has historically fought against. In order to help the economy, he needs to convince "the markets" that interest rates will be kept low even if inflation spirals out of control. The problem is that this, from an inflationary hawk like Bernanke, is unbelievable.

Avent points to a paper (pdf) which breaks down the distinction into two categories:

Delphic, corresponding to the first category above, and Odyssean, corresponding to the second, in which the central bank attempts to commit itself to deviations from typical rules.

Matt Yglesias offers a less refined version of the same strategy, breaking Bernanke's possible responses into an Eeyore response and a Tigger one. Either the Fed chief can "avoid optimistic forecasts as a way of signaling that rates will stay low for a long time," or he "can say we're climbing out of a steep hole so rates will stay low for the next 18 months come what may".

The test for Bernankeologists is to work out whether yesterday's gloomy speech is Odyssean-Eeyore, using gloominess as a mast to bind himself to, or simply Delphic, with the chairman making his most honest predictions and still being pessimistic.

Occupy LA activists march against the Fed in November. Credit: Getty

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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How Labour risks becoming a party without a country

Without establishing the role of Labour in modern Britain, the party is unlikely ever to govern again.

“In my time of dying, want nobody to mourn

All I want for you to do is take my body home”

- Blind Willie Johnson

The Conservative Party is preparing itself for a bloody civil war. Conservative MPs will tell anyone who wants to know (Labour MPs and journalists included) that there are 100 Conservative MPs sitting on letters calling for a leadership contest. When? Whenever they want to. This impending war has many reasons: ancient feuds, bad blood, personal spite and enmity, thwarted ambition, and of course, the European Union.

Fundamentally, at the heart of the Tory war over the European Union is the vexed question of ‘What is Britain’s place in the World?’ That this question remains unanswered a quarter of a century after it first decimated the Conservative Party is not a sign that the Party is incapable of answering the question, but that it has no settled view on what the correct answer should be.

The war persists because the truth is that there is no compromise solution. The two competing answers are binary opposites: internationalist or insular nationalist, co-habitation is an impossibility.

The Tories, in any event, are prepared to keep on asking this question, seemingly to the point of destruction. For the most part, Labour has answered this question: Britain will succeed as an outward looking, internationalist state. The equally important question facing the Labour Party is ‘What is the place of the Labour Party in modern Britain?’ Without answering this question, Labour is unlikely to govern ever again and in contrast to the Tories, Labour has so far refused to acknowledge that such a question is being asked of it by the people it was founded to serve. At its heart, this is a question about England and the rapidly changing nature of the United Kingdom.

In the wake of the 2016 elections, the approach that Labour needs to take with regard to the ‘English question’ is more important than ever before. With Scotland out of reach for at least a generation (assuming it remains within the United Kingdom) and with Labour’s share of the vote falling back in Wales in the face of strong challenges from Plaid Cymru and UKIP, Labour will need to rely upon winning vast swathes of England if we are to form a government in 2020.

In a new book published this week, Labour’s Identity Crisis, Tristram Hunt has brought together Labour MPs, activists and parliamentary candidates from the 2015 general election to explore the challenges facing Labour in England and how the party should address these, not purely as an electoral device, but as a matter of principle.

My contribution to the book was inspired by Led Zeppelin’s Physical Graffiti. The track list reads like the score for a musical tragedy based upon the Labour Party from 2010 onwards: In My Time of Dying, Trampled Underfoot, Sick Again, Ten Years Gone. 

Continued Labour introspection is increasingly tiresome for the political commentariat – even boring – and Labour’s Identity Crisis is a genuinely exciting attempt to swinge through this inertia. As well as exploring our most recent failure, the book attempts to chart the course towards the next Labour victory: political cartography at its most urgent.

This collection of essays represents an overdue effort to answer the question that the Party has sought to sidestep for too long.  In the run up to 2020, as the United Kingdom continues to atomise, the Labour Party must have an ambitious, compelling vision for England, or else risks becoming a party without a country.

Jamie Reed is Labour MP for Copeland.