Jim Armitage: Listening to Boston common sense would have helped the Fed on QE

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The Independent Online

Outlook All hail the Bostonians. The American city that brought us JFK, Ted Kennedy and, er, John Kerry has had a history of liberal leaders on the whole more often right than wrong. Even, let's be honest with ourselves, when they faced the Brits, in that little matter of the 1773 wet tea chest competition.

And so it is that a Bostonian emerges as the right-minded voice on the Fed this week. For it was Eric Rosengren, president of the Boston Fed, who dissented on Thursday night's decision to start trimming QE.

Mr Rosengren, whose forebears are from sensible Sweden, was a lone voice on the board of the Federal Open Markets Committee. But his was the right voice: essentially, he claimed the evidence of stronger US economic growth being sustained is simply not yet there.

He is of the view that it would make little difference to the state of the nation's finances to delay the taper until next spring, by which time we would have a clearer picture on what has been a rapid change in the country's economic circumstances. The rapidity of the improving statistics is seen by hawks as a trigger to move on monetary policy. But the correct response is to wait and see.

That's not to say the Fed blundered entirely. Rather than forcing the world into cold turkey mode all alone, it added the methadone treatment of soothing promises that interest rates would stay on hold for at least another year.

This was elegantly done, so much so that share prices and bond yields actually rose yesterday.

The question this side of the pond: where does all that leave monetary policy in the UK? Commentators have been quick to argue that the Bank of England will take direction from Washington, moving to tighten monetary policy through higher interest rates sooner rather than later.

Wrong. While the Fed's impact on the world economy and Britain's export markets will affect decision-making in Threadneedle Street, the Bank is scrupulously focused on the UK data. And, fortunately, it is not dogmatically obsessed with the unemployment rate. Low inflation is equally on its mind, as is the fact that our recent economic pick-up is far from embedded.

More important still is the uncertain nature of the current output rally. Is it really underpinned by higher exports and industry, or is it yet another consumer/housing market boom? If it's the former: fine. If it's the latter, a tweak up of interest rates would kill it stone dead.

Mark Carney and co are acutely aware of that fact. I cite as evidence the article by a bunch of the Bank's economists in today's light read, The Bank of England's Quarterly Bulletin, which showed that if mortgage rates, currently averaging just shy of 3.5 per cent, increased to 6 per cent, the number of households who would be financially "vulnerable" would double to 16 per cent. Think how much worse that would be for folks living in the South-east, where house prices, and the loans used to pay them, are even more out of kilter with average wages than the rest of the UK.

And, as you do your Christmas shopping this weekend, think how the consumer side of the economy would struggle then.