Carney and the Fed are actors and scriptwriters

A James Alexander post

In his recent extended interview with The Daily Mail Mark Carney not only raised the problem of market-deniers, those who deny the validity of rational expectations in the climate change market.

He revealed his own very confused state of mind when it comes to the future path of UK interest rates when he gave this “guidance”:

‘If we think there is a prospect, a possibility – that’s a possibility not a certainty – of rate rises, then that is far, far better to let the British people know so they can prepare,’ he says. ‘If events mean that does not happen and rate rises are not appropriate, then we will do the right thing and we will not adjust rates.’

It reminded me of the famous response from the patrician British Prime Minister Harold Macmillan when asked what could push his government off course: “Events dear boy, events“.

As his government blundered from mistake to mistake he was eventually booted out for his hopeless response to events, but many of the events blowing him off course were caused by his government in the first place.

Central bankers, like Macmillan, seem unable to see themselves as endogenous, only thinking they respond to exogenous impacts. It’s never their fault.

If they are operating with faulty Philips Curve models they will cause a lot of confusion when the economy refuses to move as they expect, as now. They think that they have to raise rates now to keep their predictions of 2% inflation in 2017-18 intact. They’ve modelled it, so it has to be true. First they corral market forecasters to predict rate rises. And then they produce circular reasoning charts like this:

JA Carney_1

As the data comes in worse than they expect they should admit their models are faulty rather than ad hoc blaming new, exogenous, “events”.

In fact, it is the markets’ belief that the UK (and US) central banks are itching to raise rates in line with their faulty inflation scenarios that subdues nominal growth and therefore inflation also. The answer is to target nominal growth, not inflation.

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