Should-Read: Alan Beattie: As they unwind QE, central banks must come clean about inflation

Should-Read: Alan Beattie: As they unwind QE, central banks must come clean about inflation: “The Fed has tightened policy and the BoE is now prefiguring a rise. Neither can point at serious signs of inflationary pressure… https://www.ft.com/content/a5dbddfa-9ebe-11e7-9a86-4d5a475ba4c5

…Both are working on the idea that traditional relationships between inflation and measures such as growth and employment are still sufficiently predictable to base monetary policy on them. In the Fed’s case, it has already raised interest four times since December 2015… [and] is clearly signalling another increase in December. This is beginning to look rather like the Fed has returned to its traditional cyclical mode of a long series of interest rate changes in one direction, rather than each move being as likely down as up. This will only be worsened if, as rumoured, the former Fed governor Kevin Warsh replaces Janet Yellen when her term as Fed chair comes up next year. Mr Warsh, who served at the Fed between 2006-2011, was a notorious worrywart about the possibility of inflation re-emerging, a threat that spectacularly failed to materialise.

As for the BoE’s warnings about rate rises in the near future, it has been here several times before and looked somewhat foolish each time. In 2013 the MPC gave unusually precise “forward guidance” that it would not raise interest rates until the unemployment rate had dropped below 7 per cent, a pledge it scrapped six months later as too inflexible. In 2014 Mark Carney, the bank’s governor, said a rise in the bank rate could come “sooner than markets currently expect”; in 2015 he said the decision on raising rates would “likely come into sharper relief” at the end of the year. Nonetheless, rates remained resolutely on hold before the Brexit-related cut in 2016.

As a Labour MP sardonically put it in 2014, the BoE has acted like an “unreliable boyfriend”. Its new idea of remedying this situation seems to be committing itself to getting married, or at least cohabiting, even though the relationship is manifestly not ready for it….

There is one decent argument for higher rates… to restrain credit growth. But that runs at a tangent to central banks’ inflation-targeting mandate. Short-term interest rates are a very blunt instrument with which to go after excessive credit growth or asset price bubbles. If central banks have decided to focus on an outcome other than inflation, they should say so. If this means admitting that their macroprudential tools for control of credit and growth essentially do not work, so be it. Credibility and transparency do not come from clandestinely trying to achieve contradictory goals with one tool.