26  The fact that such  financial cycles tend to be slow-moving – operating at longer frequency than the monetary policy horizon or even the business cycle – considerably complicates trade-off management. 27  Although by no means the sole  culprit, the absence of a body with a remit and tools to promote the stability of the financial system as a whole was a major gap in the UK’s policy framework. 28  In a sense, prior to the global financial crisis, the  macroeconomic loss function was incomplete. The principal remedy has been the establishment of the independent Financial Policy Committee (FPC) at the Bank, with a remit “to protect and enhance the stability of the financial system of the United Kingdom.” The Chancellor’s remit to the FPC defines this as relating “primarily to the identification of, monitoring of, and taking of action to remove or reduce systemic risks”, as long as its actions would be unlikely “to have a significant adverse effect on the capacity of the financial sector to contribute to the growth of the UK economy in the medium or long term.”  29  To achieve these objectives, the FPC has a range of tools, including  the countercyclical capital buffer banks are required to maintain, together with the ability to set limits on mortgage underwriting standards, such as maximum permissible debt-to-income or loan-to-value ratios. The FPC is the first line of defence against financial stability risks.
17 Inferring policy preferences from the MPC’s published forecasts in this way is not necessarily straightforward, however, because the MPC’s forecasts are conditioned on the market-implied path for interest rates. Implicitly, then, the assumption would be that the MPC’s forecasts and reaction function are, on average, well understood by the market. 18 This assumes a Phillips Curve slope, 𝜅, of ½. The lines of best fit in Charts 1 and 2 have slopes of around minus 0.3 for the period as a whole and minus 0.55 over the post-crisis period. With a value of 𝜅 = 0.5, this suggests 𝜆 of between 0.1 and 0.2 for the whole period and 𝜆 of around ¼ for the crisis period alone. 10  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches  10  To put this into some context, consider the stated and revealed preferences of the FOMC. Chair Yellen has referred to a “balanced approach” to trade-off management, implying equal weights on inflation deviations and the unemployment gap. 19  Econometric studies for the US provide a range of estimates for lambda,  centred around ½ albeit with significant estimation uncertainty, with some studies finding evidence that the FOMC’s implied lambda has also varied over time. 20  4. Why there isn’t a simple rule to achieve society’s inflation objective? This exercise illustrates how the MPC has sought to do what society has asked.