BOE independent thinking ... can we expect more?

Adam Posen, the new addition to the Bank of England Monetary Policy Committee, had many strong comments on policy in the UK. He clearly believes that the UK fiscal policy of continued deficits is not credible. For more on Posen, see the questionnaire in advance of Treasury Commitee hearing.

One of the most interesting issues is how he would exit QE. This is important given the fact that the BOE did not extend the Treasury purchase program which suggests that an exit is possible in the near future.

I will begin research on the three-dimensional exit strategy that all central banks and governments in the OECD, including critically the UK, must undertake from their emergency policy measures when the crisis is past. I say “three-dimensional” because exit will require the removal of monetary ease and liquidity, the reversal of fiscal stimulus and deficits, and the withdrawal of guarantees for, and some public ownership of, the financial sector. The timing of each on its own terms, with what practical indicators policymakers should watch, is of vital importance, as is the sequencing of the exit in each of the three areas when they will interact.

This is a thoughtful and useful way of thinking about the problem.

The interesting issue is how this would apply to the US:

• reduce the Fed balance sheet - the balance sheet seems to have stabilized
• reversal fiscal stimulus - we have not even maxed this
• withdrawal of guarantee programs - this is a real unknown but TARP pay-back is an indirect start.