Over the past six years the “hawks” among UK and US central bankers have been proven wrong. They have continued to argue that a spike in inflation was just around the corner because monetary policy was “high accommodative”. Obviously Market Monetarists have continued to argue that monetary policy has not been easy, but rather to tight in the US and the UK – at least until 2012-13.
The continued very low inflation continues to be an embarrassment for the hawks and looking into 2015-16 there are no indication that inflation is about to pick-up either in the US or in the UK.
That said, there might actually be good reasons for turning more hawkish right now – nominal GDP growth continues to pick up in both the UK and the US (I will ignore the euro zone in this blog post…)
The sharp drop in oil prices in recent months is likely to further push down headline inflation in the coming months. Central bankers should obviously completely ignore any drop in inflation caused by a positive supply shock, but with most hawks completely obsessed with inflation targeting a hawkish stance will become harder and harder to justify from an inflation targeting perspective exactly at the time when it actually might become more justified than at any time before in the past six years.
I would personally not be surprised if we get close to deflation in both the UK and the US in 2015 and maybe also in 2016 if we don’t get a rebound in oil prices, but I would also think that there is a pretty good chance that we could get 4-5% or maybe even higher nominal GDP growth in both the UK and US in 2015-16. And that would be a strong argument for a tighter monetary stance.
Hence, if strict inflation targeters would follow their own logic then they would be advocating monetary easing in 2015-16 in both Britain and the US, while those of us who are more focused on NGDP growth will likely see an increasing need for monetary tightening in 2015-16.
As a consequence if you are an old hawk who “feels” that there is a need for monetary tightening then you better stop looking at present inflation and instead start to focusing on expected NGDP growth.
But of course the idea that you are hawkish or dovish is in itself an idiotic idea. You should never be hawkish or dovish as that in itself means that you are likely advocating some sort of discretionary monetary policy. What should concern you should be the rules of the game – the monetary policy regime.