Here's a tip for the next chairman of the US Federal Reserve. Study what Mark Carney has done at the Bank of England, and do the opposite.
Carney, the former Bank of Canada governor, cannot be blamed for the improvement in the British economy between the surprise announcement of his appointment last November and his first policy move two weeks ago. With unemployment down, GDP growth up and inflation still high, his basic premise that the UK needs more monetary stimulus is no longer obviously true.
That's the big idea behind Carney's introduction of forward guidance to the Band of England's toolkit. Investors were unimpressed. Rather than follow the development to lower yields, they pushed up the UK 10-year government bond yield by 40 basis points, to 2.7 per cent. Meanwhile, Carney, who was presented to the nation as a superstar of the trade, has not taken advantage of his position. Most notably, he hasn't criticised the government's planned housing subsidies.
Of course, Carney may recover. Still, his initial stumbling should be instructive to Larry Summers, Janet Yellen or whoever else is running the Fed come January. One important lesson: in central banking right now, pragmatism is more important than imagination.
The idea behind forward guidance is imaginative. A central bank's commitment to behave a certain way in the future can have more effect on financial markets than any current action. The arguments for targeting nominal GDP, another Carney idea, are also intriguing. And, such policies may well be important some day. There may come a time for even more imaginative uses of the central bank's powers.
The most important task for the top central banker in recovering Britain, though, is to respond in a measured and magisterial way to economic developments. The politics of central banking are different in the also-recovering United States, but the primary responsibility will be to manage the delicate steps from extraordinary to more conventional monetary policy, without unduly distressing either politicians or investors.
In other words, while a deep thinker might come in handy later, for now the Fed boss would be wiser aiming to be a smooth operator.
