Huw Pill on central bank communications
The Bank's Chief Economist tried to clear up the mess around recent BOE communications last week. His answers left me more confused than ever.
Last Friday Huw Pill, the Bank’s still relatively new Chief Economist, spoke at an event in Bristol with my old colleague Soumaya Keynes. The whole thing was only an hour long and it is well worth taking the time to listen.
The most interesting section (which starts about 15 minutes in) came when Soumaya pressed in on the question of the Bank’s rather subpar (I am being polite) recent communications.
Asked whether the wide gap between market expectations of a hike and what was actually delivered in November was a problem, Pill initially tried to sidestep the question. He instead spoke about the difficulties of estimating supply and demand both in aggregate and in specific sectors and emphasised the medium-term nature of monetary policy.
…we need to be implementing monetary policy through the same medium term lengths, we can't get caught up into the sort of, minute to minute, dare I say it?, media-driven, dare I say?, market-driven dynamics which I think can be problematic so that's my view and my view is monetary policy has to focus on what other economists might call the lower frequency, the more persistent, the more underlying movements in economic data. People in the media, people in markets are always looking for the smoking gun - that indicator like inflation coming out at 4.2 instead of 4.1 on Wednesday, does that mean the Bank of England's going to move? I don't think about my decision, which I have to vote on any month in the MPC, is about any one indicator or any one tenth of a percentage point one way or the other.
There is obviously very little to disagree with in this bland statement of the obvious. Of course, monetary policy should focus on the medium-term picture and not bounce around with volatile, pandemic-effected, monthly data.
But for all Pill’s denouncements of “media-driven” and “market-driven” narratives the problem in the run-up to November was not that journalists and investors had become overtly focussed on short run data, it was that Bank of England policymakers (including one Huw Pill) were actively talking up the chance of rates moving in November. And, I would add, that the wider Bank made no effort to push back against this assumption.
Pressed about this, Pill explained that what happened in November should be thought of as a form of training.
I'd like to think that we're trying to train people to think the right way about monetary policy because good communication is where someone speaks and someone listens and you come to a common understanding
That sentence has left more than a few Bank watchers scratching their heads. What lesson exactly is the Bank’s leadership trying to impart?
Pill went on to argue that he is unsure how he will vote in December and February and to remind his audience that he was one of nine members of the Monetary Policy Committee, each with their own individual voice on the direction on rates.
I don't think I or the Bank or any policymaker really wants to introduce unnecessary volatility into what's going on but at the same time we want to say what we're doing as clearly and as transparently as we're able to and honestly and I think what we also want to do is if we can generate the genuine understanding we'll take out unnecessary volatility but it's also important that we don't try and suppress artificially volatility which reflects the true uncertainties in the economy.
This was followed by a somewhat bizarre argument, that while costs had no doubt been incurred by the volatility in markets that these costs should be thought of as an investment in coming to a new understanding. Such a new understanding was important as Britain, and the Bank, moved to a new scenario where the risks around monetary policy were more evenly balanced.
We're entering a new phase and there's a bit of learning, I recognize there's learning on the Bank side, on my personal side, but there's also a bit of learning of how to do it on the market and media side and I think some volatility in that environment is inevitable but what I hope is, is that we take a bit of that cost up front and I think we have, but that's an investment to a better relationship and a better communication recognizing that these two-sided risks are ahead in the future.
I have listened to Pill’s remarks four times in the last six days. And I still don’t really understand his argument.
If the argument is that it is the medium-term picture that matters and markets should focus less on volatile monthly data, then I fail to see why talking up a hike in November and then not delivering on it in anyway helps to “train” people to “think the right way about monetary policy”. I can see the costs, I am struggling to spot the investment.
I would have thought that if the MPC is worried about the volatile pattern of high frequency data then that is an argument for stronger guidance rather than weaker guidance.
I fully take on board Pill’s argument that he doesn’t yet know himself how he will vote in December and February. That is fair enough. But no one is seriously expecting the MPC to openly set out the exact path of tightening on a month-by-month basis for the coming 18 months now. There are plenty of helpful things the Bank could be doing to help markets understand its reaction function. The Bank could be clearer on its own estimates of the neutral level of interest rates, they could talk more about the likely level of rates at the end point of this tightening cycle rather than the timing of lift-off, they could be much more open about how a large a balance sheet they are comfortable with.
Last Friday Pill argued that neither he nor any other Bank policymaker wanted to introduce “unnecessary volatility” but that is exactly what he and Andrew Bailey did in October. Calling it “media-driven” and “market-driven” may make Bank policymakers feel better, but both the media and the markets were simply reacting to clear signals from policymakers. The lesson that many are taking from this is that they cannot trust what policymakers say. I’m not sure that’s the training Pill wanted to preside over.
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