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Bank of England’s openness will challenge Mark Carney

A general view of the Bank of England building in London.

Alastair Grant/Associated Press

It's a shame, really. Charles Evans, the president of the Federal Reserve Bank of Chicago, is scheduled to speak Tuesday night in Toronto at an event organized by the C.D. Howe Institute. The appearance represents a rare opportunity for a Canadian audience to see a "Feddie" in the flesh, and get an insider's take on how America's sprawling monetary policy machine works.

And all anyone is going to want to talk about is Mark Carney, the future governor of the Bank of England.

But Mr. Evans need not be drowned out by all the hoopla over Britain's theft of the Canadian economy's good luck charm. The Chicago Fed chief offers an opportunity to discuss both Mr. Carney's main policy innovation as Bank of Canada governor, and a little discussed challenge he will face in London for which he may be ill prepared.

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The Bank of Canada's main crisis-fighting weapon was the "conditional commitment." In April 2009, the central bank dropped the benchmark interest rate as low as possible and pledged to leave it there for at least a year, provided inflation remained contained. The commitment represented extraordinary guidance, and was meant to ignite spending by offering consumers and businesses the rough equivalent of a one-time-only sale on money.

In assessing the shock announcement Monday that Mr. Carney will be taking his talents to London in 2013, many analysts noted that the Fed has mimicked the Canadian crisis policy. The Fed is promising to leave interest rates extremely low until at least the middle of 2015, so long as the economy evolves in the way policy makers currently foresee.

But some at the Fed think Mr. Carney's policy innovation needs a little more work. Mr. Evans is chief among them. He and others on the Fed's policy committee advocate linking policy to economic variables rather than calendar dates. Rather than a conditional pledge to keep rates low until mid-2015, Mr. Evans would promise to do so until the unemployment rate falls below 7 per cent, so long as inflation remains below 3 per cent.

Fed chairman Ben Bernanke said in New York last week that the U.S. central bank is looking "very carefully" at linking policy changes to numeric targets. But there remain doubters. On the same day Mr. Bernanke made his comments about numeric targeting, and in the same city, Richmond Fed President Jeffrey Lacker said he opposes the idea. "Crisp numerical thresholds may work well in the classroom models used to illustrate policy principles, but one or two economic statistics do no always capture the rich array of policy-relevant information about the state of the economy," Mr. Lacker said.

The level of open dissent and debate is the greatest difference between the Fed and the Bank of Canada. In Canada, policy is formed by consensus at the Governing Council, although the governor alone has a statutory mandate to raise or lower borrowing costs. The Canadian convention is for the governor to articulate any shift in the central bank's policy; the deputies on the Governing Council then fan out to spread the word, never offering their own perspective. Mr. Carney did nothing to alter this approach to communicating policy; if anything, he hardened it.

He will find it harder to own the spotlight in Britain. At the Bank of England's policy committee, Mr. Carney will be first among equals, rather than the alpha in a pack. British policy makers each get a vote, and sometimes they break from the consensus. They also speak their minds.

This is important because Mr. Carney in Canada often has used communications to achieve his policy goals, whether through the conditional commitment or pithy messages meant to guide traders one way or another. But he was able to this knowing that he had full control of the central bank's message. In London, he won't have that luxury.

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"In the U.K., unlike Canada, policy is set by committee: Carney will be 'first among equals,' leading the Monetary Policy Committee, not the one making final decisions, an important dynamic that he is unlikely used to," RBC Dominion Securities' London-based European economists noted in a report Monday.

In Mr. Evans, those at the C.D. Howe event tonight will witness a living, breathing participant in this more rollicking approach to policy making. Many investors and economists complain that open debate among central bankers only causes confusion. The counterpoint is that dissent sharpens the public's interest in policy, and thereby reinforcing the central bank's legitimacy.

Mr. Carney's approach at the Bank of Canada suggests he is of the former view. That's fine, although the later soon will be his reality.

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