Failing to plan is planning to fail. Plain planning to fail is worse.

Yesterday Mark Carney presented his first Inflation Report as the new Governor of the Bank of England. This was significantly more important than anything else that happened yesterday. It was also significantly more disappointing. Mark Carney presented his vision for forward guidance. His vision is for unemployment staying above 7% for another 3 years.

The Bank of England, as I’ve argued repeatedly, is responsible for our slow recovery. I was hopeful that the appointment of Mark might help accelerate the recovery, but I was wrong. The Big Idea, touted for some time, was “forward guidance.” This is the explanation of the internal workings of the Bank of England and what they predicted would happen.

Because the Bank of England controls interest rates and the nominal economy they in large part control their predictions. They are steering the ship, and their predictions tell us where they want it to go.  What have we learned? Mark and Co will set policy in such a way that…

  • Unemployment will stay above 7% until the second half of 2016.
  • Interest rates will stay at 0.5% until the second half of 2016.
  • QE will either stay the same time or increase the second half of 2016.


  • If we hit 7% unemployment early they’ll start thinking about raising rates, even though the economy stays depressed.
  • If inflation is predicted to be above 2.5% they’ll start thinking about raising rates, even though the economy stays depressed.
  • If the financial sector becomes too exuberant they’ll start thinking about raising rates, even though the economy stays depressed.  [1]

I hope I’ve done a good job spelling out why that’s not good enough. Just in case, it’s fan chart time!

Fan chart of doom

If you’re not au fait with fan charts, then lucky you, you’ve been out enjoying the sun. The Dark blue is the central 30% prediction, the lighter hue the other 30%, the lightest the another 30% and then the last 10% is elsewhere. What you’re seeing is a prediction of failure. High unemployment out to the end of their 3 year window.

Make no mistake, Mark Carney acknowledges that the economy is in the dumps and that tools exist to do more. That’s why he was hired. He’s just decided not to do more. He’s looked at NGDP targeting, which I and many others favour, and decided it is a bad idea (largely it seems, because they don’t want to understand it). He’s had the option of targeting lower unemployment more rapidly, but hasn’t.

In his letter to George Osborne (which I recommend you read) he claims his policy is “not a monetary loosening” because policy is already “exceptionally accommodative.” I agree it is not a monetary loosening, but exceptionally accommodative? Haha. The markets agree. The FTSE 100 is 1.4% down and sterling rose somewhat, implying slightly tighter money.

Both are still healthier than when Mervyn King was in charge, but an extra million or so are still unemployed than 5 years ago and there is little sign of abatement for the next 5 years. I got some heat on twitter yesterday for suggesting feminists’, well everyone’s, priorities were wrong. Can you blame me? The central projection is for a lost decade.


[1] Nothing brings calm to financial markets like a nice growth slowdown.


6 thoughts on “Failing to plan is planning to fail. Plain planning to fail is worse.

  1. Isn’t it ultimately up to the Chancellor to change the remit of the MPC ? As long as the inflation target remains central, the MPC will be constrained in what they can do to boost employment.

  2. hola.

    this is all based on the premise that monetary policy is all-powerful, by which I mean capable of hitting an NGDP target if sufficiently aggressive (and, I suppose implicitly, without any terrible side effects on the course of doing so).

    I’ve still not really seen a convincing argument for that, other than to my mind empty statements like “the problem is nominal and the central bank controls nominal variables”

    If you take the position that monetary policy is of limited power and pretending otherwise would do bad things, then this sort of conservative / pessimistic approach makes more sense.

    1. It could quadruple QE and expand it to all sorts of corporate debt. Maybe target the exchange rate. It could buy the sovereign debt of Spain and write it off!

      Given the path of demand it has said it expects and would tolerate I doubt that it would have a huge effect before anything the bank did was unwound as inflation ticked up.

      The ammo depends on the target. The bank’s weapons are printing money and making promises. Number keep going up so depending on the promise they can have as much ammo as they want.

      I’m not under any illusions, anything big would need Treasury backing. Maybe I need to start having a go at George again.

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