Bloomberg Audio Studios, podcasts, radio, news. I am here with Andrew Bailey, who is the governor of the Bank of England, and just a little bit wet after walking on that walk. I can say it was actually really impressive. You guys seemed unfazed, but it just kept pouring on you.
I'm just keen to take some of the rain back to Britain, although I think it has started raining in Britain now. But yes, we could take some back. But yeah, no mountains today, I'm sure.
No, no, no. Today been completely swallowed. And actually Katherine Mann had the same approach that maybe we could take some of this back to England. Just want to get your sense. What was your takeaway from Fed Chairman Kevin Warsh's speech? Was it something that was a message that you were hoping for or that you thought was appropriate?
Well, look, first of all, obviously it's a cardinal rule that we don't comment on each other's monetary policy. But let me say I think, in the broad position that Chair Warsh took, I thought it was a speech of real substance. I think he made some very important points about the framework of monetary policy. I think he made very important points about forward guidance and how he's thinking about it. So I commend it because I think it was a speech of real substance.
He talked about forward guidance as being somewhat antiquated to a moment that's much more complicated and that it can be more confusing and complicate monetary policy and might have led to the 2021 delay in hiking rates to combat inflation. Do you agree? Do you think that forward guidance has outlived some of its purpose, including reaction function to some degree?
Well, I think we all wrestle with this issue. It's a really important issue. So the distinction I try to draw is this: monetary policy by its nature is in the business of making policy forwards. We can't influence what inflation's going to be tomorrow. We can influence what inflation's going to be at points further into the future. So we have to obviously look to the future, and we have to describe our policy in terms of the future. But—and Chair Warsh made this point—there's always uncertainty. There's even greater uncertainty, I would say, at the moment, particularly about the immediate situation. There is always uncertainty, and therefore our decisions are always conditional. I think the problem with forward guidance, and I think Chair Warsh put his finger on this, is that it tends towards making unconditional statements about policy. And I think that's the problem, and I think that's the danger, and I agree with him. Whether it's out of date, good question. I think the 2021 point to me as a veteran of that period is COVID was such a huge shock that we had to, in a sense—and look, there was a huge demand on us to sort of, in a sense, step forward and put the tools to work, and to do everything we could to put the tools to work. We're not in that world now, and I don't think unconditional statements about policy work in that sense. But we have to describe what we're doing in terms of our views on the future, uncertain though they sometimes are.
It was notable to me that Chair Warsh talked about the components of PCE and that it was broad-based in the US. Is it as broad-based in the UK, or is it a different inflationary backdrop due to AI, the investment there, and some of the growth backdrop that's very different for the US and for the United Kingdom?
There is a different growth story. Having said that, I think AI is critical here because we need to see faster growth in the UK. We need to see faster productivity growth, and I think AI and robotics are a critical source of that. I think the point that Chair Warsh made, which is very important—and I'll apply this to the UK—is he made a key point that he is looking to see whether—I think he used the word trend inflation, but underlying inflation is going back to target, and I think also over what period of time. And that's our issue as well. We are looking at the second-round effects of the energy shocks. We're looking at the question: over what do we expect inflation to return to target, over what time, and is that time and that trend sustainable and consistent with the inflation target? Now, in the UK situation at the moment, I would say so far I think we're seeing quite subdued second-round effects. I think we've seen a softening labor market for some time now. I think the second-round effects are at the moment quite subdued, and that's why I've taken the view that I think we can watch this situation for the moment. But every meeting we have, we have to come back to it.
How much does it force your hand if the Fed hikes interest rates, which right now the markets are expecting the Fed to do? Does it put pressure on you to match that in some capacity, partly because of the currency differentials, partly because of this race for capital, this competition for capital?
Well, I think Chair Warsh made the point that whatever the Fed does, it will do it based on its remit and its responsibilities in respect of the US, and it will do it for reasons to do with the US. We will have to take decisions to do with the UK. Now, of course, we have an open economy. We all have to see the effects of what goes on in the rest of the world on our situation and on our inflation outlook. But that's the way we do it. We don't say, "Well, they've done this, so we'll have to do it as well." We say, "What's the overall impact of all of this on our inflation situation?"
