QUESTIONS ABOUT THE FLEXIBILITY OF FUTURE MONETARY POLICY IN THE US AND THE UK

We now know that the Federal Open Market Committee (FOMC) of the Federal Reserve Bank has decided to accelerate its tapering program, so that it will buy less US Treasury debt with longer terms to maturity and fewer non-Treasury securities.  But we also now know that the FOMC does not plan to begin tightening monetary policy explicitly until next year.  This is in contrast to the Bank of England, which CNBC announced has increased its target for the inter-bank lending rate.

I have not been monitoring economic data or conditions in the United Kingdom much.  Perhaps this makes me wonder what could have led these two central banks to reach different decisions.  

Focusing on the US, did the FOMC think about the disappointing report for US retail sales from the US Census Bureau for November 2021 (announced by CNBC and others) which showed relatively modest growth when compared with October 2021?  Realizing that US retail sales are reported in nominal terms (not adjusted for inflation), is it possible that in real terms, US real retail sales fell in November 2021 when compared with October 2021?  A decline in real retail sales would imply that people in the US actually bought fewer goods and services in October 2021 than the month before.  To what extent does the possibility raised by CNBC's Steve Liesman that US consumers accelerated holiday spending into October of 2021 apply so that US consumption remains strong?  If I heard Carl Quintanilla of CNBC correctly today, then is US consumption softening?  If so, then I wonder is part of that softening due to people running out of stimulus funds?

Are the velocities of the US M1 and M2 money supplies still falling in the fourth quarter of this year?  If so, then does that help to explain relatively weak November 2021 US retail sales and the FOMC's decision?  My book It's Velocity, Stupid! has more information about money velocity in the US.

Are the FOMC and US consumers and others concerned about COVID-19 coronavirus developments?  Will people be concerned about resuming or continuing to resume normal activities?

The FOMC (and almost certainly the Bank of England) had been considering raising interest rate targets to control inflation pressure.  Recently, if I heard correctly, then frequent CNBC network guest Josh Brown said on that network that US inflation expectations over a certain duration were below three per cent.  Does this suggest that the FOMC does not need to tighten much, if at all, at least presently?  As I pointed out in previous blog posts (with links below), US Treasury interest rates are pretty low, perhaps reinforcing the view that expected inflation may not have risen very much.

https://harrisonhartman.blogspot.com/2021/12/does-money-velocity-tell-us-anything.html

https://harrisonhartman.blogspot.com/2021/12/interest-rates-expected-inflation-and.html

 

Compared with the US, are conditions very different in the United Kingdom?  If not, then does the FOMC have a stronger preference than the Bank of England for flexibility in future monetary policy decisions?  

If economic conditions are fairly similar if not very similar in the UK and the US, then was it better to start raising interest rate targets in the year 2021?  Or is it better to prepare the market for the possibility, if not the likelihood of higher interest rates next year but allow perhaps more flexibility to continue with easier monetary policy if conditions warrant such policy?  The latter strategy comes with the disadvantage of perhaps continuing to fuel inflation pressure and possibly reducing inflation-fighting credibility.  

However, as implied above, the advantage of the latter approach is that if either economic growth slows substantially for any reason, or if a problem arises in financial markets, or if inflation winds up having been essentially under control, (or a combination of two or all three of those possibilities occurs); then the latter strategy enables the central bank to continue expansionary policy with perhaps less of the appearance of reversing course.  That is to say that, in a sense, monetary policy could remain more data determined in the face of potentially great uncertainty.  And although not explicitly tightening yet but by tapering faster, the Fed injects less liquidity into the economy than it otherwise would without tapering faster, thus helping to reduce inflation pressure.

My forthcoming book will probably have more information about why the US  (and likely other countries) may want to pursue expansionary policy, and perhaps particularly expansionary fiscal  policy.  But, returning focus to monetary policy decisions, we will need to see what happens in the future to assess more completely which policy decision was better.