So, now that we have entered Q2, and with 3 months to go, how does Posen’s call look now?
CPI has fallen as the consensus expected, but it has been stickier than expected falling only to 3.4% vs consensus 3.1% for late Q1 2012.
JP Morgan expects it to average 3.0% in 2H 2012.
So what is the dovish interpretation of events?
Adam Posen is an American at the BoE Monetary Policy Committee (MPC). This is what he said one year ago:
The Bank of England‘s leading dove has predicted that inflation will tumble to 1.5% by the middle of next year as George Osborne‘s austerity drive and the underlying weakness of the economy stifle consumer spending.
In an interview with the Guardian, Adam Posen admitted he had sleepless nights over his call for more money to be pumped into the economy and said he would not seek re-election to Threadneedle Street’s monetary policy committee if his view turned out to be wrong.
Posen said: “If I have made the wrong call, not only will I switch my vote; I would not pursue a second term. They should have somebody who gets it right and not me. I am accountable for my performance. I’m holding my nerve because it is the right thing to do.”
Let´s see: The chart shows that Posen was probably seeing farther than most back in March 11, and there are still 4 months of inflation numbers to arrive before his prediction “expires”, and if over the 4 remaining months of inflation releases (March to June) inflation falls by as much as it fell over the last 4 months (1.6 pp), he´ll have made an almost exact prediction!
But that´s not, I think, the most relevant thing about what Posen said. I, for one, would not quibble if inflation is not 1.5% but remains somewhere, say, between 2% and 3%. The important point is his display of accountability: “If I have made the wrong call, not only will I switch my vote, I would not pursue a second term. They should have somebody who gets it right and not me. I am accountable for my performance”. On this topic see this Lars Christensen post:
Therefore, if you want independence for central banks – which I continue to believe is the best solution if you are going to have a monetary monopoly – then you also want to make sure that you have the highest degree of accountability.
That posture should be contrasted with the one shown, at exactly the same time, by Charles Plosser, at the time a voting member of the FOMC:
Citing the jump in energy prices, Plosser said “the reason oil prices worry me is that there will be more pressure to keep monetary policy easier for longer” as some fear these price gains will hold back growth by reducing households’ spending power.
“That response is a response that will in my view” create inflation, and “we need to lean against that,” the policy maker said.
So let´s see what transpired after he made his “forecast”. The next chart shows that oil prices went up significantly immediately after his interview, retrenched a bit and then went up even higher.
What about inflation? The chart below shows that Headline PCE went up and is now falling even though oil prices are up AND monetary policy is even “easier” – the Fed has extended the period of rates remaining low – then when he was interviewed. Core PCE has risen from “undesirable” low levels and is still below “target”. We should all be glad that the Fed didn´t “lean against that”, on the contrary.
And note that, in contrast to Posen, Plosser didn´t give any indication of having a sense of accountability. This year he is on “leave”, but will be back in a year or two and will likely act as if his previous behavior had been immaculate!