By Steven K. Beckner
JACKSON HOLE, Wyo. (MNI) – Charles Bean, deputy governor of the
Bank of England, said Saturday that further monetary easing “may yet be
necessary” to keep recovery “on track.”
Bean said that when economic and financial conditions return to
normal, monetary policy should return to a primary focus on short-term
interest-rate targets, rather than quantitative policy tools.
Bean, presenting a paper to the Kansas City Federal Reserve Bank’s
annual symposium, also said central banks’ primary goal should remain
“price stability” and he argued against raising inflation targets.
Bean said the financial crisis showed that central banks need to
monitor and guard against risks building up in the financial system. And
he said there are benefits to “leaning against the wind” of asset price
booms, but he said regulatory policy, not just monetary policy should be
used to counter such booms.
Calling the deleveraging process “incomplete,” Bean said “the
recovery remains fragile and considerable margin of spare capacity is
yet to be worked off, while further policy action may yet be necessary
to keep the recovery on track.”
Bean did not elaborate on that theme, but instead focused on other,
longer term policy issues.
Regarding the quantitative approach to monetary policy, Beans said
“asset purchases can be an effective monetary instrument,” and he said
it is possible to use them during normal times, but said “in practice it
probably makes sense to rely on a short interest rate as the primary
instrument of monetary policy.”
He cited three reasons. First, he said central banks have more
experience targeting short-term rates and “given that the impact of
changes in a short-term policy rate is both more certain and
better understood, it makes more sense to put the most weight on that
instrument rather than asset purchases.”
Second, he said “there are reasons to think that the efficacy of
(asset purchases) will be less in normal times … . During normal
times, … credit will be easier to come by and the activities of
arbitrageurs may therefore lead to the attenuation of the effectiveness
of asset purchases as a monetary policy tool.”
Third, he said “while purchases of government debt may be a
suitable last resort at the (zero bound), regular purchases during
normal times will be liable to give rise to the suspicion that the
central bank is doing so at the behest of the government in order to
lower the cost of budgetary financed, rather than for monetary policy
purposes.”
Some have suggested that the Fed and other central banks should
raise their inflation target from 2% to 4% to help them avoid the zero
bound during crises. But Bean warned “there are potential costs
associated with accepting higher average inflation.”
He said “it seems particularly dangerous to raise inflation targets
at the current juncture, as one should expect nominmal interest rates to
rise roughly in line. Even if expected long-term real interest rates
were thus unchanged, the fall in bond prices would lower wealth and
worsen the already-impaired balance sheets of financial institutions.”
So he concluded that “raising inflation targets does not seem the
most appropriate response to the crisis. It is surely far better to seek
ways of reducing their frequency and impact.”
He said a better alternative would be to target the price level
rather than the inflation rate.
Bean said price stability “surely has to remain the central
objective of monetary policy in the long run, even if other
considerations may intrude in the short run.”
“Any other objective risks de-anchoring price expectations and
inducing unnecessary extra volatility into the economy,” he added.
Accusing the Fed of practicing “benign neglect” in the years
leading up to the subprime mortgage credit, Bean said “central bankers,
as guardians of overall financial stability, need to understand the
risks building up in the financial system better than we did during the
run-up to the present crisis.”
Bean said “the case for ‘leaning against the wind’ by setting
policy rates higher during the boom seems stronger than before.”
“But at least most of the time monetary policy does not seem like
the most appropriate instrument to call on,” he continued. “The
deployment of macro-prudential instruments … seems more appropriate.”
** Market News International **
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