Select Committee on Treasury Minutes of Evidence

Examination of witness (Questions 220-235)



  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 scheduled meetings?
  (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 which positions?
  (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 direction.

  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 1935—I am not sure what happened before that—the 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 responsibility.
  (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.

Mr Kidney

  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 concerns.

Mr Cousins

  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.

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