A big week for money

Breakthroughs worldwide.

Last week might go down as one of the most important ever for monetary policy. No paradigms have shifted, and no great new knowledge has presented itself to the world, but elites across the globe have shown an unexpected ability to actually listen.

On Wednesday, the US Federal Reserve announced that it was adopt what is being called the "Evans Rule", after the Chicago Fed President who proposed it. The American central bank has always had a dual mandate – it is charged with looking after inflation and unemployment, in contrast to the Bank of England's "price stability" mandate – but this new rule makes that mandate far more explicit.

The reserve's open market committee describes the rule:

The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.

In other words, the interest rate is guaranteed to stay at its historic low of 0-0.25 per cent until unemployment is below 6.5 per cent or inflation is above 2.5 per cent. It replaces an earlier guarantee that rates would be kept low until 2015, although the reserve maintains that it expects the guidance to be roughly similar in practice (that is, they think it likely that one of those targets will be hit in that year).

The plan behind this sort of guidance is based on the fact that growth – the very thing which the Fed ought to be trying to encourage – frequently leads to inflation. For example, as the economy recovers, young unemployed people are going to be getting jobs and moving out of their parent's homes, some into new houses, putting pressure on the market. At the same time, they may start driving into work, increasing demand for fuel. That will, all else being equal, increase prices for those goods, and so increase inflation; but in this sort of situation, that's definitely a price worth paying.

Without the Evans rule, or something similar to it, businesses would expect that growth-led spike in inflation to be followed by a tightening of monetary policy. As a result, they may be unwilling or unable to borrow at the low rates we have now, for fear that they will rise shortly after – creating a vicious cycle. Fear of tightening policy prevents the growth which would lead to that policy getting tightened.

Under the new rules, Americans can be assured that, unless inflation exceeds its target by quite some margin, the Fed will continue its pro-growth policy even while growth is actually happening.

A similar change was suggested by future Bank of England governor Mark Carney in a speech on Tuesday night. Talking about the role guidance plays in central bank governance, Carney had good things to say about nominal GDP (NGDP) targeting. This involves the bank targeting, not a flat level of inflation, but a level of nominal GDP. The effect is that in periods of low real growth, the bank is prepared to tolerate much higher inflation than it is in periods of high growth – leading to similar outcomes to those described above.

In addition, since an NGDP level, rather than growth rate, is targeted, even higher inflation is tolerated in periods following a recession, as Carney explains (via FT Alphaville):

adopting a nominal GDP (NGDP)-level target could in many respects be more powerful than employing thresholds under flexible inflation targeting. This is because doing so would add “history dependence” to monetary policy. Under NGDP targeting, bygones are not bygones and the central bank is compelled to make up for past misses on the path of nominal GDP (chart 4)

Carney's speech was far less concrete than the Fed's actual adoption of unconventional policy guidance – and he also faces higher hurdles bringing such a change in. The Bank of England is statutorily required to target "price stability"; most commentators expect NGDP-targeting to therefore require at least a bill through parliament, although a minority argue that it could be an acceptable interpretation on Carney's part of that stability mandate.

And finally, just yesterday, Shinzo Abe won the Japanese election on a platform of forcing the Bank of Japan to do more monetary easing. He said before the election that his number one priority was to defeat deflation, with the *FT* reporting that:

He dismissed as “meaningless” recent moves by the BoJ, saying an October ¥11tn increase in the central bank’s asset purchasing programme was too limited to change market sentiment and that the central bank and government should agree on an inflation target of perhaps 2 or 3 per cent.

“The time has come for a general mobilisation of all policy measures to get rid of deflation,” said Mr Abe, a former prime minister who resigned in 2007 after a setback-strewn year in office.

The BoJ should embrace “unlimited easing” and also consider cutting the 0.1 per cent overnight interest paid on banks’ deposits at the BoJ to zero or a negative rate, in order to “strengthen pressure to lend”, he said in a speech in Tokyo.

Questions have been raised as to whether this is a genuine opinion of Mr Abe's about monetary policy, or merely an attempt to secure seignorage-driven income to fund higher government spending; but either way, the markets appear to trust the outcome, with the Yen plummeting and Nikkei surging

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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There is no mandate for cutting immigration at the expense of living standards

Leave voters were asked if they would pay a price to cut immigration. The answer was clear. 

The Tories are in a mess on Brexit. The nation remains divided. But everyone accepts the need to prioritise reducing immigration, even at the expense of lower living standards.

These are the three key truisms of post-referendum Britain. But it turns out that only the first of those two propositions is actually true. The third, that there is a popular will to lower immigration at almost any cost, is not true at all. The latest poll from YouGov shows that even a majority of Leave voters are unwilling to accept any reduction in their living standards at all in order to curb immigration.

In the era of "fake news", it is important to begin with the facts. YouGov conducted its latest poll on Brexit on January 11 and 12. It found that the nation was indeed split and only marginally changed from the June referendum outcome.  In this poll, 44 per cent of all voters said they would to Remain and 43 per cent said they would vote Leave. This is well within the margin of error (as was the June referendum itself), and there was little recorded movement from one side of the divide to the other.

By introducing the question of immigration the YouGov pollsters made the responses much more decisive, and quite at odds with the received wisdom on the issue. YouGov asked only Leave voters what is the maximum amount of money they would be willing to lose "in order to regain control of immigration". The responses ranged from nothing at all to accepting a loss of over £200 or month per month and all points in between. The clear majority opted for nothing at all. They were willing to make no financial sacrifice at all. 

Remember, this is solely among Leave voters. It cannot be ruled out that some minority of Remain voters are willing to give up income to see immigration. But this would surely be a minority, possibly a tiny one. Therefore, the overall majority of voters, Leavers and Remainers combined are not will to let their living standards fall in order to lower immigration.

This stands in complete contrast to widespread assertions that the narrow Leave win in the referendum was "really" about curbing immigration. Theresa May herself has said that voters gave a very clear message they wanted tighter controls on immigration.  But of course immigration was not on the ballot. We know that popular sentiment is not pro-immigration. How could it be when voters have been told for years that it is the cause of all their woes?

Still, the clear evidence from the latest YouGov poll (and others) is that voters are unwilling to accept any decline in their living standards to achieve lower immigration. This makes it clear that immigration is not the paramount issue. Living standards are, as they usually are.

This has clear implications for all political parties. YouGov’s poll shows us that Labour cannot win by promising to cut immigration at the expense of living standards, which would surely follow any decision to quit the single market. Indeed, 65 per cent of the 2015 Labour voters voted to Remain. Among the minority Labour Leavers, two-thirds would not be willing to see any fall income in order to reduce immigration. The net result is that just 1 in 10 Labour voters in 2015 are willing to cut see their incomes fall to curb immigration.

Labour’s winning strategy will be to focus on its economic programme for government. Our electoral strategy will show people how Jeremy Corbyn and John McDonnell's economic plan can make the overwhelming majority of people better off. And keep on showing them. The reactionary Tory agenda can only make people worse off.

Diane Abbott is Labour MP for Hackney North and Stoke Newington, and shadow home secretary. She was previously shadow secretary for health.