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.

Chuka Umunna speaks at the launch of Labour's education manifesto during the general election. Photograph: Getty Images.
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After so badly misjudging the leadership contest, how will the Blairites handle Corbyn?

The left-winger's opponents are divided between conciliation and aggression. 

When Labour lost the general election in May, the party’s modernisers sensed an opportunity. Ed Miliband, one of the most left-wing members of the shadow cabinet, had been unambiguously rejected and the Tories had achieved their first majority in 23 years. More than any other section of the party, the Blairites could claim to have foreseen such an outcome. Surely the pendulum would swing their way?

Yet now, as Labour’s leadership contest reaches its denouement, those on the right are asking themselves how they misjudged the landscape so badly. Their chosen candidate, Liz Kendall, is expected to finish a poor fourth and the party is poised to elect Jeremy Corbyn, the most left-wing leader in its 115-year history. For a faction that never ceases to underline the importance of winning elections, it will be a humbling result.

Though the crash has been sudden, the Blairites have long been in decline. Gordon Brown won the leadership unchallenged and senior figures such as John Reid, James Purnell and Alan Milburn chose to depart from the stage rather than fight on. In 2010, David Miliband, the front-runner in the leadership election, lost to his brother after stubbornly refusing to distance himself from the Iraq war and alienating undecided MPs with his imperiousness.

When the younger Miliband lost, the modernisers moved fast – too fast. “They’re behaving like family members taking jewellery off a corpse,” a rival campaign source told me on 9 May. Many Labour supporters agreed. The rush of op-eds and media interviews antagonised a membership that wanted to grieve in peace. The modernising contenders – Chuka Umunna, Liz Kendall, Mary Creagh, Tristram Hunt – gave the impression that the Blairites wanted to drown out all other voices. “It was a huge mistake for so many players from that wing of the party to be put into the field,” a shadow cabinet minister told me. “In 1994, forces from the soft left to the modernising right united around Tony Blair. The lesson is never again can we have multiple candidates.”

While conducting their post-mortem, the Blairites are grappling with the question of how to handle Corbyn. For some, the answer is simple. “There shouldn’t be an accommodation with Corbyn,” John McTernan, Blair’s former director of political operations, told me. “Corbyn is a disaster and he should be allowed to be his own disaster.” But most now adopt a more conciliatory tone. John Woodcock, the chair of Progress, told me: “If he wins, he will be the democratically elected leader and I don’t think there will be any serious attempt to actually depose him or to make it impossible for him to lead.”

Umunna, who earlier rebuked his party for “behaving like a petulant child”, has emphasised that MPs “must accept the result of our contest when it comes and support our new leader in developing an agenda that can return Labour to office”. The shadow business secretary even suggests that he would be prepared to discuss serving in Corbyn’s shadow cabinet if he changed his stances on issues such as nuclear disarmament, Nato, the EU and taxation. Were Umunna, a former leadership contender, to adopt a policy of aggression, he would risk being blamed should Corbyn fail.

Suggestions that the new parliamentary group Labour for the Common Good represents “the resistance” are therefore derided by those close to it. The organisation, which was launched by Umunna and Hunt before Corbyn’s surge, is aimed instead at ensuring the intellectual renewal that modernisers acknowledge has been absent since 2007. It will also try to unite the party’s disparate mainstream factions: the Blairites, the Brownites, the soft left, the old right and Blue Labour. The ascent of Corbyn, who has the declared support of just 15 MPs (6.5 per cent of the party), has persuaded many that they cannot afford the narcissism of small differences. “We need to start working together and not knocking lumps out of each other,” Woodcock says. There will be no defections, no SDP Mk II. “Jeremy’s supporters really underestimate how Labour to the core the modernisers are,” Pat McFadden, the shadow Europe minister, told me.

Although they will not change their party, the Blairites are also not prepared to change their views. “Those of us on this side of Labour are always accused of being willing to sell out for power,” a senior moderniser told me. “Well, we do have political principles and they’re not up for bartering.” He continued: “Jeremy Corbyn is not a moderate . . .
He’s an unreconstructed Bennite who regards the British army as morally equivalent to the IRA. I’m not working with that.”

Most MPs believe that Corbyn will fail but they are divided on when. McFadden has predicted that the left-winger “may even get a poll bounce in the short term, because he’s new and thinking differently”. A member of the shadow cabinet suggested that Labour could eventually fall to as low as 15 per cent in the polls and lose hundreds of councillors.

The challenge for the Blairites is to reboot themselves in time to appear to be an attractive alternative if and when Corbyn falters. Some draw hope from the performance of Tessa Jowell, who they still believe will win the London mayoral selection. “I’ve spoken to people who are voting enthusiastically both for Jeremy and for Tessa,” Wes Streeting, the newly elected MP for Ilford North, said. “They have both run very optimistic, hopeful, positive campaigns.”

But if Corbyn falls, it does not follow that the modernisers will rise. “The question is: how do we stop it happening again if he does go?” a senior frontbencher said. “He’s got no interest or incentive to change the voting method. We could lose nurse and end up with something worse.” If the road back to power is long for Labour, it is longest of all for the Blairites. 

George Eaton is political editor of the New Statesman.

This article first appeared in the 03 September 2015 issue of the New Statesman, Pope of the masses