Let’s start with the question every member of the Bank of England’s Monetary Policy Committee (MPC) loves to hate: is US recruit Kristin Forbes a hawk, a dove, or even – as deputy governor Minouche Shafik recently described herself – an owl?
Ms Forbes, a professor at Massachusetts Institute of Technology (MIT) and former White House economic adviser to George W Bush, resists classification. Her take is: “I’ve always been frustrated with that description because I am very much a person who looks at the data, comes in without priors [prior assumptions] and evaluates the situation.
“If you look at my research record and my academic track record, I take an interesting question, I really delve into the data enough and I don’t come out where my priors were. That is how I will approach monetary policy – with an open mind.”
That chimes with the description of one senior economist who knows her and calls her a “data hound”, which Ms Forbes seems happy to go along with: “I’ll continue being a data hound, although I’m not sure that’s an animal I want to introduce to the lexicon.”
She’s now one of two women on the MPC, along with Ms Shafik, after a long period with no female representation on the UK’s rate-setting body. That said, there is nothing even remotely tokenistic about her appointment. Her terrifyingly impressive CV begins in the 1980s as New Hampshire’s Presidential Scholar, before a career which took in Morgan Stanley, the World Bank and a PhD at MIT, and then being poached for the White House as the youngest ever member of the President’s Council of Economic Advisers. She’s so steeped in the profession she even got married at the Mount Washington hotel at Bretton Woods, venue of the 1944 conference which shaped the post-war economic world order (although she insists the historical resonance of the venue was secondary to the superb hiking the resort affords).
Ms Forbes spoke to me on the day of her first MPC speech, in which – inspired by the Midsummer Night’s Dream she saw at the Globe last year – she’s been “creating mischief” like Puck in the forest, discussing the exchange rate. That’s usually a topic that all but the most senior of central bankers tend to shy away from, at the risk of sending shockwaves through currency markets.
She finds that the pound’s 14.5 per cent appreciation between March last year and this July is likely to have driven the cost of living – currently 1.5 per cent and below target – up to one percentage point lower than it would have been by the end of this year, had the strengthening of the currency not happened. But stripping out the currency effect, she also finds little evidence of underlying domestic inflation.
That view puts her in a different camp to her fellow external MPC members Ian McCafferty and Martin Weale, who are both voting for rate rises.
In the course of her research, she reveals a refreshing ability to change her mind. “When I initially started work on the speech I was surprised, when you estimate the effect, at how large that deadening effect has been on inflation, suggesting that the 1.5 per cent headline inflation today could be masking stronger underlying inflation pressures ... Then as I dug deeper, looking at the underlying inflation – the domestic inflation – that was weaker than I had expected, even after you take out the effects of the stronger exchange rate.”
But before we rush to put Ms Forbes in the doves’ coop, she adds a warning – and with it a dig at the historic nature of the data she’s been working with. “We need to be vigilant, we need to be alert. The past data has not yet shown signs of inflation picking up. The one thing that has concerned me as I’ve gone through the data is that so much of the data is lagged. We just got data for the quarter ending in June, so that’s showing a trend that started in April.”
A frustrated Forbes stresses we need to focus more “on any measures of prospective inflation that we can”. That involves speaking to companies directly as well as the Bank’s network of agents who are reporting signs of increased pay pressure, difficulties in recruiting and skills shortages. And to MPC critics such as former member David Blanchflower, who believe the Bank is underestimating the slack in the UK jobs market, she says: “I’m not sure I would go all the way as far as David has, but I think he has a good point.”
What are the big risks to the UK’s recovery? Ms Forbes declines to give a view on whether European Central Bank president Mario Draghi should be launching a full-blown quantitative easing programme, but the woes of the eurozone are clearly high on the worry-list. In a week that inflation in the single currency bloc fell to just 0.3 per cent, she adds: “Policymakers do need to be cognisant of the risks of deflation or very low inflation. We know from the history of Japan that this can make it very hard to grow and recover, especially with high debt levels.”
She’s also worried by UK consumers plundering their savings to fuel recovery. “We’ve seen investment pick up, and that’s been an important source of growth, but consumption is also key to a sustainable, balanced recovery. Consumption recently, though, has been driven by workers depleting their savings, not by higher wages. More people are working and that has provided some support to incomes, but to see this recovery sustained... you do need to see wage growth.”
Another big concern is her academic specialism: financial contagion. She says: “I worry that not enough people pay enough attention to contagion risks. Often, especially in larger countries, people get too focused on the domestic issues and domestic risks and lose sight of how vulnerable they are to all sorts of events that can happen around the world.”
We can expect the MPC to remain vigilant. For like the course of true love in Shakespeare’s play, the UK’s recovery – and the path of inflation – never did run smooth.
Curriculum vitae: Kristin Forbes
1970 Born in New Hampshire
1988 Presidential Scholar, meeting Ronald Reagan
1992 Joins Morgan Stanley
1993 Joins World Bank
1998 PhD and teaching at MIT
2003 Serves as youngest ever member of President’s Council of Economic Advisers
2005 Returns to academia
2012 Gives acclaimed Jackson Hole speech on financial contagion
2014 Appointed to MPC for three-year term
Personal life Married, three children. Interests include hiking and marathonsReuse content