In search of a target or of an excuse?

To me it sounds very much like the later:

In an interview with the Bristol Post newspaper published Tuesday, Mr. Carney declared that “substantial” wage rises will be needed to ensure the economic recovery that began last year is sustained. That is an unusual message for a central banker to deliver. Usually, they warn against large wage rises for fear they will lead to a self-perpetuating inflationary spiral. But Mr. Carney’s comments reflect the fact that central banks across the developed world are facing an unusual challenge, with inflation rates too low rather than too high. It may also mark an evolution in his thinking about how to assess spare capacity in the economy. Under Mr. Carney’s leadership, the BOE in August delivered “forward guidance” to the effect that it wouldn’t consider a rate hike until the unemployment rate hit 7%. As that way station was approached, in February it altered that guidance to refer more broadly to spare capacity in the economy, with Mr. Carney noting that there were other forms of labor market slack, such as workers not being able to put in as many hours as they would like to. Carney’s remarks reflect an increasing focus on wages in policy circles. Two former Bank of England officials who are based at U.S. institutions have recently urged the Federal Reserve to focus on evidence of wage gains rather than falling unemployment as a sign the economy is improving enough to start raising interest rates.

With rates at “zero” for more than five years, central bankers are getting skittish. The “Jeremy Stein school of (financial instability) thought”, in which higher rates are better for the economy´s health, is garnering followers. Long ago, when he was named to be the next BoE chief, Carney seemed to be in search of a target, not an excuse:

From our perspective, thresholds exhaust the guidance options available to a central bank operating under flexible inflation targeting. If yet further stimulus were required, the policy framework itself would likely have to be changed.19For example, adopting a nominal GDP (NGDP)-level target could in many respects be more powerful than employing thresholds under flexible inflation targeting. This is because doing so would add “history dependence” to monetary policy. Under NGDP targeting, bygones are not bygones and the central bank is compelled to make up for past misses on the path of nominal GDP.

Pity that once you become a central banker you´re “baptized” in the “interest rate altar”.

HT Patricia Stefani

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