Carney’s words signal step change at Bank
First and foremost, he does not believe monetary policy is maxed out, but nor does he believe it has eliminated tail risk or is capable of doing so.
Second, he believes it is worth keeping up the easy money guidance until the economy achieves escape velocity, rather in the way Ben Bernanke, chairman of the Federal Reserve, has in the US. The present Bank of England incumbent, Sir Mervyn King, has tended to eschew such practices.
Providing this is consistent with achieving price stability in the medium term, and a clear time frame is given, Carney does not seem to see much wrong with adopting more overt growth objectives.
And finally, he thinks that the growth in shadow banking and the too-big-to-fail issue have to be quite urgently addressed. This is all reassuringly straightforward and sensible stuff, and not so dissimilar to what the Bank of England has been doing.
Unfortunately, the message seems to have become somewhat lost in the Bank’s embarrassment at repeatedly missing the inflation target. It’s all in the way you say it, and we can expect to see Carney finesse the guidance in a way that gives markets and business a lot more confidence than we have seen to date.
I don’t want to be unduly critical of Sir Mervyn, whose public service in difficult times has been exemplary, but his Eeyore-type proselytising and determination to bullet-proof the banking system has had a quite chilling effect on sentiment and credit growth.
Reading between the lines, Carney is not at all keen on the more radical monetary options touted by one of his rivals for the job, Lord Turner, such as monetising the deficit or helicopter money. These leave no escape route, so that when economic activity picks up, it is difficult to remove the stimulus, ramping up inflation.
And then finally on the big issue of whether easy money should be accompanied by some loosening of fiscal austerity, Carney was right on message. Monetary policy must be set to accommodate the fiscal squeeze, he said.
As I say, reassuring stuff.