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.

Nicola Sturgeon. Photo: Getty
Show Hide image

For the first time in decades, there is genuine dissent in Scottish Nationalist ranks

The First Minister is facing pressure to talk less about independence - and bring on new talent in her party.

She so recently seemed all-powerful, licensed to reign for as long as she chose, with the authority to pursue the return of our national sovereignty. We would then have the ability to strike our own deals on our own terms, a smaller, smarter, leaner nation freed from the stifling constraints of partnership with a much larger neighbour. There was, she repeatedly told us, nothing to be afraid of.

Now, suddenly, she is the victim of her own miscalculation: having misread the public mood, having raced too far ahead of moderate opinion, she finds herself at bay. The voters have delivered a public humiliation, while an opposition party until recently lampooned as unelectable is on the march. There is, suddenly, talk of her departure sooner rather than later.

Yes, this is a tough time to be Nicola Sturgeon…

Let’s not overstate it. The position of Scotland’s First Minister is considerably more secure than that of the UK’s Prime Minister. Theresa May wants out as soon as is feasible; Sturgeon, one suspects, will have to be dragged from Bute House. Sturgeon retains enough respect among the public and support among her colleagues to plough on for now. Nevertheless, things are not what they were before the general election and are unlikely ever to return to that happy state.

It’s all because of Scexit, of course. Sturgeon’s unseemly sprint for the indy finishing line left enough Scottish voters feeling… what? Mistreated, taken for granted, rushed, patronised, bullied… so much so that they effectively used June 8 to deliver a second No vote. With the idea of another referendum hanging around like a bad headache, the electorate decided to stage an intervention. In just two years, Sturgeon lost 40 per cent of her Westminster seats and displaced half a million votes. One could almost argue that, by comparison, Theresa May did relatively well.

For the first time in decades, there is genuine dissent in Nationalist ranks. Tommy Sheppard, a former Labour Party official who is now an influential left-wing SNP MP, published an article immediately after the general election calling on the First Minister to ‘park’ a second referendum until the Brexit negotiations are complete. There are others who believe the party should rediscover its talent for the long game: accept the public mood is unlikely to change much before the 2021 devolved elections, at which point, even if the Nats remain the single largest party, Holyrood might find itself with a unionist majority; concentrate on improving the public services, show what might be done with all the powers of an independent nation, and wait patiently until the numbers change.

There are others – not many, but some – who would go further. They believe that Sturgeon should take responsibility for the election result, and should be looking to hand over to a new generation before 2021. The old guard has had its shot and its time: a party with veterans such as Sturgeon, John Swinney and Mike Russell in the key jobs looks too much like it did 20 years ago. Even the new Westminster leader, Ian Blackford, has been on the scene for donkey’s. There are more who believe that the iron grip the First Minister and her husband, SNP chief executive Peter Murrell, have on the party is unhealthy – that Murrell should carry the can for the loss of 21 MPs, and that he certainly would have done so if he weren’t married to the boss.

The most likely outcome, given what we know about the First Minister’s nature, is that she will choose something like the Sheppard route: talk less about independence for the next 18 months, see what the Brexit deal looks like, keep an eye on the polls and if they seem favourable go for a referendum in autumn 2019. The question is, can a wearied and increasingly cynical public be won round by then? Will people be willing to pile risk upon risk?

As the hot takes about Jeremy Corbyn’s surprise election performance continue to flood in, there has been a lot of attention given to the role played by young Britons. The issues of intergenerational unfairness, prolonged austerity and hard Brexit, coupled with Corbyn’s optimistic campaigning style, saw a sharp rise in turnout among that demographic. Here, Scotland has been ahead of the curve. In the 2014 referendum, the Yes campaign and its can-do spirit of positivity inspired huge enthusiasm among younger Scots. Indeed, only a large and slightly panicked defensive response from over-65s saved the union.

That brush with calamity seems to have been close enough for many people: many of the seats taken from the Nats by the Scottish Tories at the general election were rural, well-to-do and relatively elderly. The modern electorate is a fickle thing, but it remains rational. The Corbynites, amid their plans for total world domination and their ongoing festival of revenge, might bear that in mind.

Chris Deerin is the New Statesman's contributing editor (Scotland). 

0800 7318496