Bank of England policy maker Adam Posen called on central banks from Europe to the U.S. to be more aggressive in combating lackluster economic growth and inflation.
As he prepares to leave the U.K. central bank today, Posen said the Bank of England should “more actively” consider buying assets other than gilts, the Federal Reserve should pursue more quantitative easing and the European Central Bank should intervene to reduce bond yields in Spain and Italy.
Posen steps down after three years as a member of the Monetary Policy Committee, having led the charge for expanding monetary stimulus in the U.K. His pitch for central banks to do even more runs counter to the warning of some officials and analysts that fresh asset purchases would have limited economic impact.
“If the ECB and the Fed and Bank of England just continue to try to straight-up meet their mandates it would lead right away to more policy activism,” Posen told Bloomberg Television’s Michael McKee yesterday at a conference of central bankers in Jackson Hole, Wyoming.
The Bank of England is right to be “open to” more asset purchases if needed by the economy and should also look to buy corporate bonds or securitized business loans to “more directly address the shortfalls in the British credit system,” Posen told reporters at the symposium.
The U.K. central bank’s Monetary Policy Committee next meets Sept. 6, two months after increasing its quantitative easing target by 50 billion pounds ($79 billion). It said this month it will assess “other potential policy options” as it reviews the impact of its funding for lending plan to boost credit.
Posen said it’s “premature” to judge the success of that plan.
He said he doesn’t see “any particular advantage” in cutting interest rates because more quantitative easing can achieve the same result and it has been argued that market structures could be damaged as borrowing costs near zero.
“We believe QE is largely substitutable for cutting rates,” Posen said. “It’s not a perfect substitute, but it roughly does the same thing.”
As he prepares to return to the U.S. to head the Washington-based Peterson Institute for International Economics, Posen said the Fed should introduce another round of bond purchases known as quantitative easing given that U.S. inflation is low and unemployment is too high.
“What definition of the Fed’s mandate do you have that doesn’t say you should be trying to respond to this,” he said. “It’s not that easing is always the answer, it’s that sufficient ease is hard to achieve when we’re in this kind of situation and you’ve got to keep going until you get to that sufficient ease.”
Fed Chairman Ben S. Bernanke, who said last month a third asset-purchase program was an option, has an opportunity to update his policy outlook today in a speech at the symposium.
While the Fed is studying the U.K.’s program to boost credit to companies and households, Posen said the program may not be suitable because the U.S. banking system is in better shape than the U.K.’s and commercial lending is less of a problem.
Posen praised suggestions for the Fed to better outline what it is trying to achieve, saying he had sympathy with Chicago Fed President Charles Evans’s proposal that the Fed shouldn’t raise interest rates until the unemployment rate falls below 7 percent or inflation rises above 3 percent.
“It’s not about the number, it’s about providing a baseline to which the central bank can be held accountable and people have a way of talking to each other,” he said.
Turning to the ECB, Posen said bond yields in Spain and Italy are out of line with economic fundamentals and it’s within the central bank’s mandate to correct that, perhaps by buying the debt and setting yield caps.
ECB President Mario Draghi’s decision to withdraw from the Jackson Hole conference suggests the ECB is working on a plan ahead of the Sept. 6 meeting of its Governing Council, he said.
“It is difficult if not impossible to justify their long bond rates being as high as they are,” Posen said. “It is entirely within a central bank’s mandate and capabilities to deal with that. They should be intervening.”
Posen recalled that the Hong Kong Monetary Authority bought stocks during the Asian financial crisis in 1998 to temper what it perceived to be a “generalized panic” and ended up making a profit.
“Arguably that’s what you could get in Italian and Spanish bond markets,” he said. “People’s expectations are reset and suddenly those bonds are down 150 basis points and you can sell them back,” Posen said, referring to yields.
While critics say the ECB would undermine its credibility and independence from politics by buying sovereign bonds, Posen said the real threat to its standing would be “running a policy that seems to willfully ignore your mandate, seems to play politics or in the extreme leads to very bad outcomes.”