GIC College of Central Bankers Perspectives

September 1, 2022

A recent Op-ed in in Financial Times, Stop berating central banks and let them tackle inflation, was discussed amongst Fellows and Advisory Board members of the College of Central Bankers. We are pleased to share the thoughts below for your review and sincerely invite your comments.

Paul Horne, GIC Board Member, CCB Advisory Board Member, and Independent International Market Economist

Considering the extraordinary circumstances generated by the “smartest guys in the room” which led to the financial crisis; the crisis of the rickety Euro System; and a Black Swan named Covid, I think the Fed and ECB deserve huge plaudits.

As well as patience while they try to navigate from QE to QT, reduce inflation without a recession and… protect their independence from would-be autocrats.

Peter A. Gold, Esq., Chair of the College of Central Bankers, GIC Vice Chair and Principal, TheGoldGroup, LLC

I’m with you on this Paul.

During COVID Crisis Fed was only quasi-governmental institution to actually perform its mission; 2) Many in the political class (i.e. Sen. Warren) want to and are bashing Fed. That’s because, in part a) politically its good currency ( pardon the pun) b) Fed is an easy target that cant overtly bash back; and c) in reality ( whether they know it or not) they want Fed to be independent so they —the political class–have the luxury of blaming it for downtimes and they can take credit for uptimes. If they destroy Fed’s independence, then what will be left? A huge and marginally functional merger of fiscal and monetary policy in something call the Federal Government? Over the years we have seen how well that works re price stability, employment and frankly vision and leadership.

Danny Blanchflower, CCB Fellow and Former Member of the Monetary Policy Committee of the Bank of England

It seems to me that central banks have brought much of the opprobrium on themselves, noting that they in fact failed to spot the Great Recession and were still going on about the risks of inflation in the summer of 2008.  Groupthink is fine if you get things right and not so if you get it wrong.  Where was the learning?

Then in the intervening years, FOMC in particular had no explanation for weak wage growth and the Fed wrongly raised rates from 2015-2018 believing that the labor market was at full employment when it clearly wasn’t.  The unemployment rate is no longer a measure of labor market slack as it doesn’t enter wage equations as it did pre-2008 (see Blanchflower, Bryon Spurling nber paper).

The idea that it was possible to forecast in this complex world was always flawed – central banks should have said there are several scenarios and we don’t know which is coming.  If scenario A we do this, scenario B we do that. They wrongly narrowed their options and pretended recent past was prologue.  That way they would have diversified their portfolio and not be sideswiped by the Ukraine war.

The current situation is highly complex and warrants many alternative views on where we are and where we are going but groupthink prevails again.  But groupthink prevails again.  Where are the dissenting voices noting there hasn’t been a dissent by a governor since Greenspan.  The suggestion that there will be a soft landing is simply guessing and mostly ignores the fact that the global economy is slowing fast in China, Germany and the UK especially.  The Baltic Dry Index which collapsed in 2008 fell 3.7% on Friday to 1082 down from 5600 in November as has the Drewry freight index.  The cost of shipping around the world has collapsed presumably driven by collapsing global demand.  What if I am right?  The Fed especially haven’t covered this downside while the ECB has much more.  Why not?  It seems they are engaged in guessenomics rather than serious analysis which is why they are in trouble again.

There has been little discussion of the dangers of deflation.  The MPC in their most recent forecast is suggesting a drop of 2% in GDP over next three years with a 55% probability of cpi <1% in 2024 and a significant prospect of deflation.  I think that forecast is too optimistic as cpi set to hit 18% in January. 

The attached graph from BOE shows that over the last 810 years in 340 there was deflation which is what we can’t rule out.  Where are the dissenting voices?  Nobody can rule out that within two years inflation goes too -4% and it seems historically more likely than a return to say inflation rates of +4%

Central banks have brought this on themselves with groupthink.  Where are the dissenting voices especially on the labor market?

The collapsed consumer confidence data is consistent with the US being in recession from the start of 2022 consistent with the two successive quarters of negative GDP growth.  My recent paper on this explaining why the US is in a recession is here published this week here

What are they going to say in 2024 if cpi is -4%?  Surely if we learnt anything from the GR it was to diversify our portfolio.  I am not saying deflation is going to happen but it might, as might rapid drops in output and big falls in LFPR… The fed can’t rule that out but has

Also note Powell talked about pain but note there is a new paper by Robert MacCulloch and co-authors coming out in JMCB showing that a 1pp rise in the unemployment rate raises pain 10-13 times more than a 1pp rise in inflation. I can send it if people interested.

Groupthink has narrowed the options so the rise in inflation looks unexpected.  Things are set to get worse and soon I suspect.

So I dissent…!

Charles Plosser, CCB Fellow and Former President & CEO of the Federal Reserve Bank of Philadelphia

I agree that the Fed needs to be independent and seriously attack inflation.

Powell gave a very good speech Friday. He made all the right points to signal the importance of the Fed doing its job to control inflation. We all are hoping it will deliver.

A couple of observations.

Where was this recent version of Powell a year ago?  Moreover, where was this version of Powell in August 2020 when the new strategic plan elevated inclusive employment over inflation as a strategic imperative?  It is good that the Fed has found worth in the old lessons of monetary policy but it was the dismissal of the “old religion” that led us to this current situation.  When will it find a new cause to celebrate or new political imperative and put on a new hat? One might argue this is a form of independence but it is a false one.

I feel strongly about independence but independence should not be a sometime thing or mean it can do anything it wants and not be accountable. The Fed itself as taken actions that have undermined their own independence and invited greater politicization.  The vast array of fiscal policy actions, mostly in the form of credit allocations and lending, have opened Pandora’s Box to political abuse of the Fed’s balance sheet by Congress and the Executive branch. This goes along with the hubris shown by the central bank that it can and should be responsible for economic outcomes over which it has little or no control. This, too, poses a grave threat to independence.

So the Fed needs to avoid undermining its own independence by refraining from activities that are better left to the political process or the private sector. Failing to do so is an invitation for political interference.


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