In the Press

GCI in the Financial Times

LETTERS TO THE EDITOR: What the Bank of England can learn from the Federal Reserve
Financial Times; Dec 14, 2000

From Mr Blair Baker.

Sir, The non-executive directors of the Bank of England are to be lauded for commissioning Donald L. Kohn, the Federal Reserve board's director of the division of monetary affairs, to prepare a report that highlights the difficulty of reconciling the nine different voices within the Monetary Policy Committee and the need to present a coherent and unified message to the public ("Fed urges MPC to clarify inflation report", December 7).

The vox populi of most central bank watchers suggests that the ideal central banking model is probably somewhere between the workings of the Federal Open Market Committee and those of the MPC.

One of the most regular criticisms of the MPC is that its composition does not reflect the regional idiosyncrasies and sectoral demands within the UK. This partially stems from the fact that the 12 agencies supplying the MPC with information on a monthly basis do not directly participate in the voting process.

In contrast, the FOMC's rotating rota of regional Federal Reserve Bank presidents ensures that fresh perspectives are introduced annually.

Notwithstanding the difference in size between the US and the UK and the FOMC's putative rubber-stamping of chairman Alan Greenspan's musings every sixth Tuesday, the decentralisation of authority atop the Fed has served the US well. It has limited the ability of markets to classify voting members as monetary hawks or doves and deduce erroneous policy judgments in the intermediate term. Compare this with the MPC where resident arch-hawk deputy-governor Mervyn King and resident arch-dove DeAnne Julius have dissented with the would-be tie-breaking vote of governor Sir Edward George no fewer than nine times each since the committee's inception three years ago - a stalemate.

The Bank of England, however, should be lauded for the level of transparency it aspires to promote. Whereas the minutes of each MPC meeting are published about two weeks after the monthly interest rate deliberations with a full tally of individual members' voting records, it was only recently that the FOMC began offering its inter-meeting policy bias concurrently with its policy announcement. This initiative has effectively removed Fed watchers' six weeks of guesswork. Proponents of further MPC transparency are calling for individual members' views to be attributed in BoE's quarterly forecast and inflation report.

Despite the shortcomings of the Old Lady of Threadneedle Street, policymakers are to be commended for taking steps to address the Bank's growing pains. While the Fed should in no way be deemed a perfectly functioning monetary authority, some recent initiatives have improved the manner in which it communicates with the markets - a vital function of central banks the world over. Sir Alan, anyone?

Blair Baker, Director of Market Research, GCI Financial Ltd

Copyright: The Financial Times Limited.