Examination of witness (Questions 220-235)|
MONDAY 26 FEBRUARY 2001
220. Do you think the forecast setting process
contributes to a deflationary bias?
(Mr Kohn) Not in my knowledge or not to my observation.
I think it is an honest attempt to get that, to figure out where
inflation is going and what the forces are that will bring it
to 2.5. I do not see anything in the process itself that would
contribute to a deflationary bias. At the same time it is quite
clear that inflation has come in under the target for almost two
years now. It is forecast to stay under the target for another
year or so even in the forecast so it is a very legitimate question,
I think, to ask of the MPC members: is there something in your
process which has contributed to this persistent miss? I do not
know what it is. I cannot put my finger on it, if it is something.
I think they were surprised by a number of things, most particularly
the strength of the pound relative to the euro which no-one was
predicting. It is a very legitimate question.
221. In fact, the Fed has been able to move
interest rates between scheduled meetings.
(Mr Kohn) Very rarely. Since 1994 I can think of three
in the last six years, almost seven years, and the only times
that the Federal Reserve does that is if a situation is moving
very, very rapidly such that the recent decision clearly has been
invalidated by developments. The most recent two examples were
obviously early this year in January and after the financial market
crisis in the Fall of 1998. So I would think if the MPC went to
fewer meetings they could obviously make those decisions. It is
as easy for them, if not easier, to get together between meetings
if absolutely necessary to make those decisions. That is another
reason why I would not expect fewer meetings to influence the
way the rates are being set particularly.
222. Do you think in the United States there
is particular significance given to an interest rate change between
(Mr Kohn) I think there is in the sense that it clearly
connotes that the Committee was surprised by the information becoming
available since its last meeting or it would not have taken this
unusual step. And I think in the recent cases that I can think
of it has been pretty clear what those surprises are and the Committee
has been concerned that waiting until the next meeting would be
unnecessarily harmful to the economy so it needs to act. It is
a very good idea to do most of your actions at the meeting so
that markets and the public can anticipate when they are going
to act, so you can sit down and have a full discussion with the
full staffing background briefing before the meeting, and you
can publish a statement afterwards. So I think the Federal Reserve
has gotten away from between-meeting moves. In the early 1990s
we made lots of moves between meetings in response to individual
pieces of data. I do not think that is necessarily productive.
When the Monetary Policy Committee or Federal Reserve is clear
about what it is worried about, where it thinks the economy is
going, what its concerns are, as new data comes in, the markets
usually (not always) do a very good job of anticipating where
the Federal Reserve is going to go. So it is not usually necessary
to move between meetings. The markets, in effect, build in actions.
But when the markets do not do an adequate job, or your concern
is that the situation is developing so rapidly that the markets
may be constrained by the fact you have not moved, then it is
time in those very rare circumstances to do something.
223. You have described the feeling of some
members of the Monetary Policy Committee that other members of
the Monetary Policy Committee were "playing games" in
order to produce an inflation forecast that was favourable to
their basic point of view. Do you think it would be helpful if
the minutes of these meetings made it clear who was taking up
(Mr Kohn) Not necessarily. Let me also start by saying
224. You do not think that that would be an
antidote to the process you have just described?
(Mr Kohn) No because, number one, my guess is there
is a lot less of this game-playing going on now than there used
to be because they have changed their processes (partly in response
to conversations I had in my report when I was there) so I do
not think it is as big a problem as it was. Secondly, I think
people need to feel that they can take positions at a meeting
in a conversation they are having with their colleagues without
worrying about having to write down why they might have changed
and exactly what that position was. There is a give and take process
in which, hopefully, if the Committee is working right, minds
are changing, otherwise it is not worth having a Committee; you
might as well mail in your votes. So making people justify exactly
every position they took is potentially destructive of the Committee
process, the give and take of the Committee.
225. Just a couple of points on our own parliamentary
scrutiny. Of course, Congress has its own scrutiny in the United
States, which we have seen in operation. One aspect of it is the
so-called confirmation hearings. We do not pretend to have confirmation
hearings or when we say it we put it in inverted commas. What
happens in our situation is that members who have been nominated
by the Chancellor come in front of us and we ask them questions
related to their competence and independence. Do you think that
is a good idea?
(Mr Kohn) It is hard for me to say in your system
since I do not know all the aspects of your system. I think it
is a difficult subject in the sense that in the US the confirmation
hearing has a grounding in the Constitution, and the separation
of powers between the executive and legislative branches, and
that is not true here. If you thought that the confirmation hearings
were serving a purpose that would help the MPC over time and would
help your accountability of the MPC and you could define those
purposes clearly and key the confirmation hearings to that, I
think then that would be helpful. If in the process of the confirmation
hearings you are, in effect, putting the candidates or the nominees
on notice that they will be held accountable for their views in
front of your Committee, that they will be expected to contribute
to the Committee process when they are on the Committee in a constructive
way, that is useful. In reading some the background material for
this I guess I would have some concern as to whether the degree
of individual accountability at some point does not interfere
with the process of the group's decision-making.
226. That is not so much a criticism of us;
it is the way it has been set up in the first place?
(Mr Kohn) Exactly, but also if I were in your shoes
it would shape the way I would carry out my obligations to hold
the MPC accountable. It is the Committee that is accountable under
the Chancellor's remit, it says the MPC is accountable and the
individual accountability is in some sense a way into group accountability.
It is not clear to me that the same individuals who would do a
good job at the give and take before this Committee would be exactly
the same individuals who would make the biggest contribution to
the Monetary Policy Committee. Let me put it another way. Somebody
who did not do a good job in the give and take here might still
make a major contribution to the work of the Committee. It might
be the type of person who asked the appropriate question at the
right time, even if that person was not as articulate as some
other person. I would also be concerned that moving towards more
individual accountability and making people justify in writing
every vote, every time, of pushing them very hard, would interfere
with the process of the group coming together and trying to form
a consensus, although of course you cannot form a consensus and
everybody has to vote in the end what their conscience tells them
to vote. There is give and take here and I am somewhat concerned
that the more you focus on the individual, some of this might
happen at the expense of the group. I do not know where that line
is and I have trouble giving specific examples and my feeling
may come in part from coming from another organisation in which
there is a much more consensus driven organisation, the Open Market
Committee. People do dissent but most members of the FOMC field
a relatively high hurdle for their dissent. They have to feel
strongly that the group is wrong before they dissent and they
use the possibility of dissent to try and move the group in their
227. It is only Chairman Greenspan that comes
before Congress committees?
(Mr Kohn) That is right but it is a Committee and
the Chairman works with the Committee and the Chairman tries to
bring consensus before the Committee. In our system, at least
since the current operation of the Open Market Committee was constructed
in 1935I am not sure what happened before thatthe
Chairman has pretty well represented the Committee, particularly
in front of Congress or in dealings with the executive branch.
It is a Committee structure and the Committee does constrain what
the Chairman can do. When a Chairman is speaking on monetary policy
issues, he is very conscious that he is speaking for the Committee
as well as for himself, even if he puts his own spin on it to
a certain extent, he knows he is speaking for the Committee and
it is a different statement than if he was making the statement
for himself alone.
Sir Michael Spicer
228. It just seems to me, Mr Kohn, the group
accountability you have described can be the opposite of accountability,
it can be a self-protecting society.
(Mr Kohn) That is true.
229. It seems to me you actually have to get
individuals eventually to take some responsibility.
(Mr Kohn) That is right.
230. Either you get individuals on the Committee
to take responsibility or you have to get the Chairman to take
(Mr Kohn) Right.
231. You have described a situation where the
Chairman can himself hide behind this Committee and say "This
is a consensus, nothing to do with me guys".
(Mr Kohn) Everybody recognises he is the leader of
the Committee and he is the one who is testifying. There is no
way in which he is hiding behind the Committee, I hope I did not
imply that. I did not mean to imply that. I just meant to imply
that he is the leader of the Committee.
232. You would accept an individual or individuals
have to take accountability?
(Mr Kohn) Absolutely. I completely agree. Individuals
need to be responsible for their votes and explain why they voted.
My concern is how much pressure you put on those individuals may
affect how they interact with the rest of the group. I do not
know where the dividing line is but I can imagine that putting
lots of pressures on the individuals may interfere with their
ability or willingness to interact with the rest of the group.
You are right, ultimately there is not group accountability unless
it is through the head of the group, it has to be the individuals
in the group. It is a question of how you carry that out.
233. A representative of the Treasury attends
the meetings of the MPC: is that an aid to the process or is that
a possible weakness to it?
(Mr Kohn) The people I talked to thought it was a
plus in the process, that the Treasury was careful not to try
and steer the Committee's monetary policy decision but the Treasury
representative was very useful in giving the Committee a view
on where fiscal policy was going, what the budget was likely to
be like. The people I talked to had no problems with the way that
had been carried out, that was working fine.
234. That might be this Chancellor or this representative
but there might be different ones with different objectives, what
do you think about that in the system?
(Mr Kohn) I think one needs to be very careful that
the ground rules need to be set out very carefully so that no
Treasury representative would attempt to influence the MPC and
to raise or lower interest rates just for the sake of raising
or lowering interest rates. No-one from the outside could get
the impression that an MPC decision was influenced by the Treasury
representative rather than by the attempt to hit the remit. I
think given the specificity of the remit that the MPC has from
the Chancellor by and large this is not going to be a problem.
They are told what they need to do and they have to justify their
interest rate decisions based on that. It would be odd for a Chancellor's
representative to give advice or pressure to a Committee that
was inconsistent with the Chancellor's remit. I think the structure
of the system tends to mitigate against those concerns but I could
not tell you that under no circumstances would there be any such
235. You said earlier that in the workings of
the Federal Open Market's Committee there is a high hurdle rate
for dissent. I think that is interesting. Do you think in our
system with individual votes recorded and able to see positioning
over long periods of time of particular individuals, that the
hurdle rate for dissent is perhaps much too low?
(Mr Kohn) That is hard for me to say because I have
not studied the voting records of the individuals and their rationales
for their votes. On the Open Market Committee it varies from individual
to individual how they consider the hurdle but there is definitely
a sense of trying to live with the consensus if possible. I do
not know really the thought processes of the MPC in deciding whether
to dissent or not so it is very hard for me to answer that question.
Chairman: Thank you very much indeed.
Thank you, Mr Kohn, for coming all that way and being so extremely
helpful to us.