The Bank of England monetary policy committee is meeting today, to decide two things: whether to raise the interest rate, and whether to continue with quantitative easing (QE) at the current level. Of those, the one everyone cares about is the interest rate, which has been at a record low for a record period of time now – over three years.
The bank is unlikely to make such a change now. Despite low inflation, real interest rates are still negative in many areas, and with stagnation the best-case scenario for the next quarter, the MPC is likely to play it safe.
While we wait, we can pore over the decision of the United States' Federal Reserve Open Market Committee, which just released the minutes of its March meeting. The meeting wasn't to discuss interest rates (for that we have to wait until later this month), but was instead focused on whether or not to perform another round of QE, which involves the central bank buying back its own assets.
Although the topic is rather off the agenda in the UK (even though we started a third round of QE last year, in what was an embarrasing volte-face for the chancellor, who had previously called such a move "the last resort of a desperate government"), in the US it is a big deal. Markets had been expecting a resumption in activity after a speech given by Fed chairman Ben Bernanke last week, in which he expressed doubts that the rapid pace of job creation was sustainable. In addition, in their last statement on the matter, in January, the committee had suggested it would resume QE "before long".
The reason for the change in policy was a belief that the potential for growth in the economy had declined. Without this slack capacity, asset purchases are much more likely to lead to spurts in inflation.
This much is agreed on. However, there is a dispute even within the committee as to the potential harm that such extra inflation could lead to. QE is often seen as a trade-off between inflation and unemployment, increasing the former and reducing the latter; in a scenario where inflation is below even the official target of 2 per cent, and unemployment is way too high (although declining), this trade-off was thought by many to be the obvious choice.
The committee's minutes reveal:
A couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below its mandate-consistent rate of 2 percent over the medium run.
Even that is hedging it slightly. As the Cleaveland Federal Reserve reported last month, the market is currently pricing in an inflation expectation of under 2 per cent for the next thirty years. While the market may be wrong, as Matt Yglesias argues, it seems pertinent for the Fed to at least explain why they think it is.
The real reason for this caginess is that federal bankers seem to do anything to avoid being portrayed as an inflation dove. Inflation can be harmful indeed, but right now the misery in the States is coming from unemployment. The failure of the Fed to tackle it is becoming more obvious every month.