At the end of June, the Bank announced a set of macroprudential actions designed to mitigate the risks from the housing market (not to control house prices per se). The Bank was able to construct policies which would operate directly on the flow of debt arising as a result of the housing market. It was clear that the FPC should take the lead in using these tools, but drawing on a common macroeconomic assessment (provided by the MPC’s forecast, with policy analysis coming jointly from across the Bank) and a micro assessment provided by the PRA. The FPC could then set the overall macroprudential parameters by a Recommendation, with the particular policies being implemented by supervisory processes consistent with the PRA’s objectives, and by the rules of the FCA. Indeed it is worth noting at this point that the coordination circle does include the FCA – the CEO of which sits on both the FPC and the PRA Board. One could extend the three-committee analysis in this lecture to four. That brings us to the question of the policy levers themselves. Is it the case that each committee has instruments which are both sufficiently effective and independent? The MPC clearly has strong influence over the price and quantity of money. Bank Rate is a basic price of money: the rate paid to commercial banks on their reserve holdings at the Bank of England.
Another angle to cooperation arises from the “long and variable lags” in the economy – and not just in the monetary transmission process. Each committee can face very long and uncertain lags between deciding to take a policy action and the maximal impact on its objective. That makes it unlikely that any one objective can be achieved precisely at all points in time. As well as predictable lags, policy outcomes are subject to all sorts of random disturbances that constantly require changes to policy settings. Suppose, however, a committee actually tried to obtain its objectives at every moment in time regardless. That would likely necessitate wild swings in policy settings: imagine the MPC trying to set Bank Rate so that 2% inflation was achieved exactly every month! Not only would it quickly prove impossible, attempting the feat would drastically reduce the chances of the other committees achieving their objectives. So a degree of humility is required by each committee, for the sake of coordination as well as the credibility of each. In their commitments to hit their statutory primary objectives I would say that: •  The MPC should not be “inflation nutters”. •  The FPC should not seek the “stability of the graveyard”. •  The PRA Board should not seek to implement a “zero failure regime”. That is supported helpfully by the secondary objectives of each policy maker. One can interpret them in several ways, but to me they help put the primary objectives in an overall context.