MNI INTERVIEW: QE Rules Should Be Clearer-Ex-BOE's Forbes

Central banks should lay down clear principles for future emergency monetary policy action of the sort seen in March, helping investors better anticipate future easing and lessening any pressure to automatically respond to falling markets, Kristin Forbes, a former Bank of England Monetary Policy Committee member and New York Fed adviser told MNI.

While March's rate cuts and quantitative easing were targeted at clear market dysfunction, at a time when bond markets froze, investors are now unsure whether future adverse events such as further intensification of the Covid-19 pandemic or a no-deal Brexit might prompt a similar response. The question of whether the main objective of any such action would be simply to ensure market functioning or to stimulate the economy is also unclear.

"There should be some basic principles to help guide central banks in the future when there are periods of market disruption," Forbes told MNI after the Money Macro & Finance conference in London, adding that what was needed was "a framework at the very least."

But she warned against being too precise in identifying pressure points which would trigger intervention.

"A concrete trigger/threshold could … create distortions if certain activities are subject to a central bank put, while others aren't. A trigger could also aggravate panic if pricing neared the trigger point," said MIT Professor Forbes, a member of the New York Economic Advisory Panel.

QE BETTER IN TIMES OF STRESS

Some, including current BOE Monetary Policy Committee member Gertjan Vlieghe, have said that at current interest rates QE is most effective at moments of market stress. But Forbes pointed to the positive impact of the BOE's asset purchases in the wake of the June 2016 vote to leave the European Union, when markets were not severely stressed, while also acknowledging that there been insufficient examples of QE in action to identify variations in its efficacy in different economic environments.

"Nonetheless, I would like to see central banks being more transparent about the ranges they use for the impact of QE (and other tools) in different environments," she said, adding that more research needs to be done on the effects of asset purchases and on appropriate frameworks for their use.

Despite these uncertainties, Forbes said central bank policymaking is not more obscure now than it was in the past.

"This crisis is fundamentally different in the sense it is driven by an exogenous pandemic … (but) if anything, central bank actions are better understood than they were in 2008 when many of the tools were new," she said.