The Sunday Times February 6, 2022 9
BUSINESS
T
ransitory is out, elevated is in.
QE (quantitative easing) is out,
QT (quantitative tightening) is
in. Negative interest rates are
out. We now know what
medicine the Federal Reserve
has in mind for the US economy.
But we cannot be certain of the
efficacy of the planned doses. Cooling a
red-hot economy is no walk in the park.
The great American job-creation
machine rolls on. It added 467,000 in
January, even as Omicron was running at
its peak. The unemployment rate, at
4 per cent, is down 2.4 percentage points
in the past year; the number of
unemployed persons down 3.7 million.
Little wonder that lay-offs are at a record
low as employers grapple their workers
to them with hoops of steel, while quit
rates are at a record high as workers
survey the 11 million unfilled job
openings. In short, the labour market is
strong enough to tolerate a tightening of
monetary policy without creating a
reserve army of the unemployed.
This is not, however, unambiguously
good news for the Fed, as a tight labour
market creates upward pressure on
wages, which in turn raises costs and
adds to similar pressure on prices. The
reported 5.7 per cent jump in hourly
wages this past year, a post-Covid high,
was more than wiped out by the 7 per
cent jump in the prices of stuff that
workers’ families loaded into their
supermarket trolleys.
As Fed chairman Jay Powell considers
his options, he faces a board unlike any
he has confronted, inflation with
important differences from early bouts,
an economy far different from that on
which earlier boards operated, and a
society that questions the competence of
its governing institutions.
Start with the board. It will be very
different from previous ones. President
Biden’s three nominees have focused on
racial and gender disparities, climate
change and the regulation of bankers.
The Fed, of course, was thinking about
all these issues well before Joe Biden
made his selections. Still, it is one thing
to accept climate risk and inequality as
appropriate for consideration, quite
another to deem them central issues of
concern. Which makes it difficult to
predict which way the newbies will jump
as policy to cool inflation develops.
This new group of policymakers faces
a new sort of inflation, different in a big
way from those it has dealt with in the
past. The spurt in prices is partly rooted
in supply-side constraints rather than the
more familiar Keynes-style shortfall in
demand. In addition to labour shortages,
ports cannot handle the volume of goods
headed to America, the construction
industry cannot find enough materials to
build the homes buyers are demanding,
and microchips are in such short supply
that vehicle production is constrained.
Monetary policy is not equipped to cope
with such problems, at least not directly.
Then, too, the vehicle in which we are
travelling — call it economy Model 2022 —
is very different from the one that
careened off the growth road in 2007-09,
when it hit the ravine-sized pothole that
was the overstretched housing market.
The pandemic has left some of the firms
that survived its consequences weakenedsufficiently to make their ability to survive
a Fed-induced slowdown uncertain. And
consumers, with some 58 per cent
anticipating a recession, are wary, now
that various benefits have expired and
they have whittled down their bloated
savings. The sound of wallets being
zipped up echoes around shops.
Perhaps most important, Americans
are uneasy after two years of coping with
the pandemic. Suicides are up, as is drug
addiction; crime is rampant, with thugs
looting stores, cops assassinated and
miscreants going unprosecuted; illegal
immigrants, some with criminal records,
are being awarded airplane tickets to
their cities of choice; carers never know
when they wake up in the morning
whether their kids’ schools have been
shut by the teachers’ union, or they can
go to work; if the latter, they wonder ifIrwin Stelzer American Account
public transportation is safe. It is not
unreasonable to wonder whether such a
society, with confidence in government
economic policies at its lowest since
2014, will calmly tolerate an economic
slowdown, especially if inflation
continues to nibble at the value of
workers’ pay cheques.
The Fed plans to calibrate its response
to incoming data. Two problems. First,
the data can be massively different from
forecasts: witness Friday’s revision of the
December job-creation figure from a
disappointing 199,000 to a buoyant
510,000. Second, the patient’s reactions
to the Fed’s adjustment of the dosage of
its anti-inflation medicine will not
become immediately apparent.
Investment decisions will be revised only
after boardroom review and multiple
PowerPoint presentations, while
consumers will not immediately adjust to
the higher cost of borrowing by forgoing
purchase of the cars they have been
dreaming of when they finally become
available. In the end, the Fed will be
forced to rely on its judgments.
Unfortunately, those judgments have
too often resulted in recessions. Perhaps
this time round its policymakers will not
emulate Napoleon, who, historian AJP
Taylor wrote, “learnt from the mistakes
of the past how to make new ones”.
[email protected]
Irwin Stelzer is a business adviserMonetary policy
is not equipped
to cope with the
problems of 2022These are not the
sunlit uplands
people might have
expectedS
uper Thursday has many
meanings. It describes those
occasions when several
important elections take place
simultaneously, or when
people like me try to analyse a
bunch of official statistics
published at the same time on
that day, some getting missed in the
rush. In publishing, there is a Super
Thursday each autumn, with more new
books published than on any other day.
We had a Super Thursday last week,
though most people would say Black was
a more appropriate description. First off
was the announcement of a huge 54 per
cent increase in the energy price cap to
within a whisker of £2,000 a year —
£1,971 — by Ofgem, the energy regulator.
Then came Rishi Sunak’s measures to
ease the energy burden — yet another
significant fiscal announcement made
separately from a budget or other formal
occasion, as often during the pandemic.
Finally, the Bank of England stepped
up, raising the official interest rate to
0.5 per cent, as had been widely
expected but also revealing more
hawkishness than anticipated. Four of
the nine members of its monetary policy
committee (MPC) voted for a bigger
increase in rates, to 0.75 per cent.
Not only that, but as I suggested last
month, the Bank has shifted from
quantitative easing (QE) to quantitative
tightening (QT). The massive QE it has
undertaken since the depths of the
financial crisis will be gradually
reversed. Again, this went a little further
than expected.
There are two elements to QE. Most,
£875 billion of the £895 billion total, is in
UK government bonds. The Bank’s
decision not to reinvest the proceeds of
these gilts when they mature, which it
has been doing up to now, will reduce
QE by nearly £28 billion next month as
part of a total of £70 billion over 2022
and 2023 combined, and by a further
£130 billion during 2024 and 2025.
That would still leave the stock of gilts
held by the Bank at £675 billion at the
end of 2025, though the Bank could go
further to reduce it by actively selling
gilts back to the markets. It could begin
to do that, on its own rule, when Bank
rate reaches 1 per cent; markets have in
mind a 1.5 per cent rate in the next year
or so. Whether it does so or not,
Thursday’s decision gives the lie to the
many people who have told me over the
years that QE would never be reversed.
This is even more the case with the
£20 billion corporate bond element of
QE, to be fully unwound by the end of
2023 through not reinvesting maturing
bonds and active sales.
What do the first back-to-back interest
rate increases for 17 years, QT, and the
chancellor’s response to energy rises tell
us? Does raising rates make a bad
situation worse, as some say?
Thursday’s flurry of monetary and
fiscal announcements tells us, first and
foremost, that policymakers have been
badly caught out by the surge in
inflation. There was an element of panic
in these moves. The particular problem
for the Bank, as its governor Andrew
Bailey discussed in the press conference
after the rate increase, was that given the
lags between changes in monetary
policy and their impact, it would have
been necessary to raise rates before
there was any sign of the danger and in
the middle of the pandemic — at a time
when the chancellor, through fiscal
policy, was providing extensive support.
There is never a good time to put rates
up, but that would have been a bad time.
As for the chancellor, giving with one
hand while taking away with another is
not a good look, and reflects the danger
of pre-announcing tax rises. Some of
those, notably the potentially painful
freezing of income tax allowances and
thresholds in April, date back to the
budget in March last year, when it was
reasonable not to have foreseen the
extent of this spring’s inflation.
But in September, when the national
insurance increase was announced, it
was already clear that inflation was
soaring, as were energy prices. I suspect
that the Treasury was focused on getting
the NI rise agreed, as it was last SundayThe answer is that higher rates reduce
inflation, and this was well put the other
day by Catherine Mann, a newish
member of the MPC. As she put it: “I
know there has been a lot of talk already
about the cost-of-living squeeze. And to
be clear, it is not my goal to make this
worse than it already is. To the contrary,
I aim to bring inflation back down to
target such that workers can enjoy real
wage gains from their labour.”
An interesting real-life experiment is
under way. The European Central Bank
is much more reluctant to raise rates,
leaving it later, though it admits the
inflation risks. It would have been hard
for the Bank to do that, given its forecast
of 7.25 per cent inflation in the spring.
We will see which approach works best.
PS
Many column inches have been devoted
to the government’s “levelling-up” white
paper. The general view is that it is high
on ambition but low on funding. Some of
its ambitions — that by 2030, pay,
employment and productivity should
have risen in every part of the UK — do
not look demanding. It would be
surprising if that were not to happen,
even if nothing was done. So, for
example, there are now 70,000 more
employees in the northeast than eight
years ago in 2014, and more than
300,000 more in the northwest.
The paper reminded me that very
little has changed when it comes to
regional inequalities in the UK, and what
can be done about them, compared with
when I wrote my book North and South
in the 1980s. This is not a plug, by the
way; it has been out of print for years.
One thing did jump out at me, from
the introduction to the white paper by
Michael Gove, the secretary of state for
levelling-up, and Andy Haldane, the
former Bank of England chief
economist, who was brought in to help
get the white paper done.
They write that they want to end the
“postcode lottery” of life so that “by
staying local, you can go far”. The aim
appears clear — to create a country where
the most talented young people do not
have to leave their towns for London or
other big cities to progress in careers.
This may be a popular idea, but unlike
some of the other goals, it does not
appear achievable or desirable. Many
young people find their new career
locations having gone there to study at
university, and will continue to do so.
There will be regional specialisation and
sector clusters in the future if the aims of
the white paper are to be fulfilled, and it
will make sense for people to move
between regions if their skills and
education are in those specialisations.
One of the longstanding problems of
the UK has been too little rather than too
much geographical mobility of labour —
people moving between different parts
of the country for work reasons — in
comparison with more productive
countries such as America. It is why one
aspect of regional policy used to be
“taking workers to the work”, the other
being “taking work to the workers”. It
would be a mistake to reinforce the UK’s
low geographical mobility even if, as I
say, it sounds superficially appealing.
[email protected]in this newspaper, ensuring Downing
Street was fully on board for the increase
with a joint piece confirming it from the
chancellor and prime minister.
The chancellor’s moves — a £150
council tax reduction on most
properties and a £200 reduction in
energy bills in October, paid back in five
£40 instalments in future years — aim to
soften for the majority about half of the
£693 increase in the energy price gap.
They will leave in place most of a two-
year drop in real incomes, which the
Bank says is the biggest for decades.
These are not the sunlit uplands
people might have expected — if not
after Brexit, then after the pandemic.
They are also indicative of the start of a
tougher time for the chancellor,
assuming he stays where he is. The debt
interest bill is rising, with both bond
yields and official interest rates set to
rise further, and despite last week’s
announcements, the Santa of the
pandemic has been replaced by the
Scrooge of the recovery, as Sunak seeks
to repair the public finances.
Could the Bank have made life easier
for people by not raising interest rates?
This is the oldest question in the book,
though given the rarity of rate rises in
recent years, it has lain dormant. I used
to get asked a lot why the Bank — or in
pre-independence days, the chancellor
— was adding to inflation by increasing
rates. Those were also mainly the days
when the standard measure of inflation,
the retail prices index, included
mortgage interest payments.Consumer price inflation
6%Bank rates
0.8%INTEREST RATES ARE RISING ...
... AND SO IS INFLATION
Source: Bank of EnglandSource: ONS0-2242012 2013 2014 2015 2016 2017 2018 2019 2020 20212012 2013 2014 2015 2016 2017 2018 2019 2020 20210.40.60.20David Smith Economic Outlook
A red-hot economy
is not easily cooled
Rampant inflation lets the
Bank’s hawks take flight
London insurance market worked with
the Treasury to devise a set of laws that
could allow the UK to break into a slice of
a $54 billion-a-year product called
insurance-linked securities (ILS). These
are sophisticated corporate products
only bought and sold in lengthy contract
negotiations between experts.
Yet, after the laws were introduced in
2018, the FCA’s sister regulator, the
Prudential Regulation Authority,
insisted on wrapping them up in red
tape to “protect” the buyer.
A salutary lesson came next:
Singapore copied the UK laws and has
been trouncing us in the market ever
since, pulling off 18 big ILS deals to
Britain’s five. The half dozen it did last
year alone were worth £700 million.
It’s right that the regulator should
protect consumers; near-zero interest
rates have made them vulnerable to
snake-oil salesmen on Google and
Facebook. But — with appalling
exceptions such as payment protection
insurance — most of the culprits have
been small operators at the margins that
the regulator wasn’t watching.
Rather than fritter resources on newrules that create a quagmire for the whole
industry, it should focus on properly
implementing the existing ones.
British boards need to be daring
The worst result of Unilever’s botched
efforts to take over Glaxo Smith Kline’s
consumer business could be that it makes
other FTSE 100 bosses too terrified to
ever try a gutsy takeover again.
The vitriol levelled at the Unilever
board by its shareholders in the
aftermath would put off all but the
thickest-skinned chief executive.
Boards already tend to be overly risk
averse — which is understandable given
how the big fund managers in London
prefer dependable dividends to
dynamic, transformative actions.
American investors seem less lily-
livered, and have more trust in the
instincts of the management teams they
back. That, in turn, builds braver
attitudes to risk and greater rewards.
From Brexit to the tech boom, there are
many reasons why the Dow Jones
industrial average is up 73 per cent over
the past five years and the FTSE only 4 per
cent, but British timidity is one.The Financial Ombudsman Service will
adjudicate, and has been working with
the FCA on how to interpret the rules.
That’s good, but even if the majority of
claimants don’t win (40 per cent of claims
were upheld last year), their cases may tie
up businesses in paperwork, which
drives up prices for everyone.
When finance firms squeal about new
rules, it usually means the rest of us
should cheer. The FCA’s predecessor
regulators were too lax, and that helped
the banks cause the global financialW
e live in a world where
packets of cashews include
the warning “may contain
nuts”. So perhaps we
shouldn’t be surprised to
see creeping nanny
stateism from the Financial
Conduct Authority.
The regulator that failed to prevent the
London Capital & Finance scandal, the
British Steel pensions farrago and the
Connaught affair (a queasy precursor to
LCF) says it wants to force financial firms
to put the customer first.
It is consulting on reforms that would
change companies’ duty of care from
“treating customers fairly” to making
sure punters have “good outcomes”.
That may not seem much on first
reading, but think about it. Hoping for a
high return in exchange for a bit of risk,
you buy an investment product made up
of shares. The stock market tumbles and
you lose a chunk of the money.
You knew there was a risk, so you
have been treated fairly. But is it a good
outcome? Hardly.
Alternatively, you suffer from a health
condition that regularly requires
hospital treatment. When you try to get
travel insurance, the premiums are
through the roof. Fair? Arguably, yes —
Direct Line and the rest are pricing in the
likelihood of an emergency flight back to
the UK.
But is it a good outcome that you can’t
afford to travel? Of course not.
Yet surely it is not reasonable to force
the investment company to refund the
damage the stock market did to your
portfolio, or to make the insurer lower
your premium to get you on the flight.
Financial services chiefs fear this is
the route the FCA wants to go down, and
are, frankly, hopping mad about it.
The regulator protests that this is not
the plan at all, and the examples above
are far from its intention. Its idea of a
good outcome is simply that the firm has
explained everything clearly and not put
in unfair clauses to rip people off.
But will customers take that view of
what “good” means? Doubtful.
More likely is that many will use the
rules as justification to complain that
their bets have gone sour. Cue a flood of
compensation demands spurred on by
ambulance-chasing claims managers.Banking and credit
Insurance (excluding PPI)
Investments and pensions
PPI
Claims management firms
Overall upheld claimsSUCCESSFUL COMPLAINTS
AGAINST FINANCIAL FIRMS
46%
31%
22%
13%
40%
40%
Source: Financial Ombudsman Service 2020-21crisis. Now, though, there is a risk we
swing too far in the other direction.
In some areas of insurance, the good-
not-fair revolution could even extend to
cases where big businesses are the
customers. These aren’t Aunt Agathas
looking to insure their caravans, but
multinationals with professionals
negotiating on every clause. They really
don’t need regulators getting in the way
of an equal-sided transaction.
I’m told the FCA appreciates the
absurdity of this and will think again, but
it would not be the first needless
intervention in grown-ups’ commerce.
We need a regulator that gives the
public confidence in financial products,
but does not deter enterprises from
coming to the UK to create new products
and innovate. The rules, as they stand,
largely do that, hence the likes of Klarna
and Revolut choose to operate here.
Britain is an island but the financial
world is global, with aggressive rival
nations eager to eat our lunch. That was
the message of City insurance grandee
Caroline Wagstaff to a recent House of
Lords committee on regulators. She
explained how, a few years ago, theJim Armitage
Good outcomes? The road to hell
is paved with bad regulations