There is a flavor of Kremlinology when it comes to following the thinking and planning of the world’s central bankers. Although their most market-sensitive decision-making happens behind closed doors, much of their thinking is readily available. Studies and policy papers appear and feed an entire industry of journalists and analysts covering the Bank of England, Fed, European Central Bank, Monetary Authority of Singapore, and all the others.
The curtain on much of the background considerations and policy position planning has been pulled up once each year since the early 1980s, in the spectacular mountains of Wyoming. There several hundred economists and central bankers gather to converse and to step back from their daily work to review invited research presentations. The objective is to calibrate monetary policy and other central bank goals with ever-evolving economies. Events can lead to course corrections in the days and months to follow, but the public information shared at the annual Jackson Hole Symposium is of great importance to WAIFC members and their constituent bodies.
As in 2020, the Symposium this year was held virtually. The central question was how to guide macroeconomic policy in a time of uneven economic growth. The program outline is available online, including the speeches delivered and the presentations made by economists. It is worth reviewing the themes of several segments, as well as quoting more extensively from US Federal Reserve System Chairman Powell’s remarks.
The essential problem is how central bank and government fiscal policy tools can be wielded to meet the very different needs of economic sectors with varying growth rates domestically and in the global economy. One set of monetary rates and tools, and the complementary sets of tax policies have to accommodate economies that have been upended by the Covid pandemic, and that simply does not work easily or evenly. The basic problem is historically true for them, only in 2020 and again this year much more so; the Covid pandemic has drastically accelerated the unevenness, and so the challenges for policy-makers.
As regards monetary policy, “The Covid-19 crisis has been a stark reminder that some macroeconomic shocks can have uneven effects across sectors. Uneven shocks pose important challenges to policy, given that different sectors can suffer from opposite problems: some may be experiencing insufficient demand and unemployment, while others may be subject to supply constraints, causing shortages and inflationary pressures. How should monetary policy respond to this type of situation? Is the optimal response to target economy-wide average measures of inflation and of the output gap, or do the asymmetries across sectors require a deviation from standard recommendations, in one direction or another?”[1]
The tables and charts with global data on the slides prepared by Gita Gopinath, Economic Counsellor at the International Monetary Fund, are especially presented on the symposium website and are valuable to the WAIFC audience. She demonstrates how policy leaders responded with unprecedented joint monetary-fiscal support to sustain economic output as it was tumbling and compares their response in 2020 with that of the Global Financial Crisis in 2008-2009. The policies now obtaining have given rise to concerns about debt levels and a return to higher inflation. Ms. Gopinath shows how adverse monetary policy spillovers across sectors and countries could exacerbate diverging recoveries in place and time. She lays out the challenges that remain as structural drivers are expected to keep real interest rates low, and in conclusion, assesses how well the authorities have responded in their guidance of the economy. And, as well, she adds the essential reminder for the entire world that this unevenness will hit developing countries all the harder, given their relative lack of resources and so their lesser ability to be resilient.
The US dollar, its value and its costs, affect the WAIFC community in diverse ways, and so it is worth examining the points raised by Fed Chairman Powell.
“Strong policy support has fueled a vigorous but uneven recovery—one that is, in many respects, historically anomalous. In a reversal of typical patterns in a downturn, aggregate personal income rose rather than fell, and households massively shifted their spending from services to manufactured goods. Booming demand for goods and the strength and speed of the reopening have led to shortages and bottlenecks, leaving the COVID-constrained supply-side unable to keep up. The result has been elevated inflation in durable goods—a sector that has experienced an annual inflation rate well below zero over the past quarter-century. Labor market conditions are improving but turbulent, and the pandemic continues to threaten not only health and life but also economic activity.”
The Fed places great emphasis on employment: “The outlook for the labor market has brightened considerably in recent months. After faltering last winter, job gains have risen steadily over the course of this year and now average 832,000 over the past three months, of which almost 800,000 have been in services… The pace of total hiring is faster than at any time in the recorded data before the pandemic. The levels of job openings and quits are at record highs, and employers report that they cannot fill jobs fast enough to meet returning demand.”
Concerning the inflation outlook that has been so widely reviewed in the press, in the Chairman’s view broad-based inflationary pressures remain absent. With the economy recovering so quickly, shortages in specific goods and services spiked but have since been easing. Despite record jobs on offer and labor in many sectors being in short supply, there is little in the Fed’s data to suggest that there will be sustained inflationary pressures due to wages as the labor market continues to rebuild. While searching for indicators on long-term inflationary expectations that might be growing, as of now the Fed sees little of that on the horizon. Since the 1990s, in many areas of economic life disinflationary forces have, on the contrary, been at work.
Broadly speaking, the Fed’s two key tools are asset purchases and interest rates. The Fed is looking to end its acquisition of new bonds. Given the great care with which central bankers express themselves, and for very good reason, it is best to cite the Chairman directly:
“Even after our asset purchases end, our elevated holdings of longer-term securities will continue to support accommodative financial conditions…..
The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test. We have said that we will continue to hold the target range for the federal funds rate at its current level until the economy reaches conditions consistent with maximum employment, and inflation has reached 2 percent and is on track to moderately exceed 2 percent for some time. We have much ground to cover to reach maximum employment, and time will tell whether we have reached 2 percent inflation on a sustainable basis.”
There we have it: policy-makers in the era of Covid, with the globalization of disease as well as the production of goods and services, these rather blunt tools in the hands of our central banks have done much to limit the damage to our economies since the start of 2020. No doubt as much care will be needed going forward, given the unevenness of our growth patterns, by sector in our nations as well as from country to country. This is what we must work with.
[1] “Monetary Policy in Times of Structural Reallocation,” Veronica Guerrieri, Chicago Booth; Guido Lorenzoni, Northwestern; Ludwig Straub, Harvard; and Iván Werning, MIT, as presented at the August 2021 Jackson Hole Economic Symposium.