The symposium of Jackson hole Today is the most significant event of the year on the calendar of the central banking community. Every time the bankers of the world gather in the mountains of Wyoming – these days, in remote meetings – they often take the opportunity to expose important events in the way they think and practice monetary policy.
The speeches in Jackson hole policy makers – especially the inaugural address by the president of the Federal Reserve from the United States, Jerome powell– are a key source of information to understand what will come next, in the economy and in politics. This year’s symposium comes at a good time to provide that information.
It goes without saying that we are in an unprecedented economic situation. Monetary policy has never been more flexible. Fiscal policy has perhaps never been more stimulating, at least when not at war. Never before have we consciously shut down entire economies to fight a pandemic and have never experienced a recovery from them. And all this is in addition to long-term changes in the economy that forced a profound rethinking of how to do economic policy even before the pandemic. The economy is much more difficult to predict and politics much more difficult to plan than usual.
There is a theoretical and empirical disagreement on the benefits and risks of “making the economy warm up” (Neil Irwin, of the New York Times, exposes the debate very well). The cause and consequence of the debate is that we do not know whether the economy is more likely to respond with growth or inflation to the unprecedented stimulus of aggregate demand.
In addition to this underlying uncertainty come fluctuating short-term signals about the health of the recovery of EU against the increase in infections due to the delta variant of the coronavirus and on what the members of the policymaking committee of the Fed they think it should be done.
Still, we must make decisions based on what we think is going to happen, and “we” includes investors with money at stake in the markets, companies and workers who do their best to guess the demand for their products and their hand. work in the years to come, and the Fed. The homework of Jerome powell is to help make those decisions in the most informed way possible.
As it says Mohamed El-Erian In an op-ed for the Financial Times, “a consecutive number of people are waiting to hear what only Powell can offer: when and how Fed it will move away from the covid-related emergency measures that were introduced at the beginning of the pandemic. Recent economic data accentuate the need for clarity in this regard ”.
As pointed out El-Erian, the “preference of Powell for a slow stepped evolution in policies ”is well known. However, it is not well or fully understood. The change in strategy of the Fed Last year he moved toward a more patient approach to economic expansions, raising the threshold for tightening as the economy approaches full capacity. What everyone else – and perhaps her own Fed– need now is a clearer idea of where that threshold is.
However, I do not think that this is a detailed guide to the when and how of the “gradual reduction”, that is, ultimately, the reversal of purchases of financial securities by the Fed to relax financing conditions. I think what Powell has to provide is something more general, but useful. Given the Fed’s inclination last year towards a more patient approach to economic expansions, what is needed is a more detailed explanation of what patience means for the economy. Fed.
The European Central Bank (ECB) has given an educational example. Although it was a year behind the Fed in completing its policy strategy review, it shifted in a similar direction: towards a more patient attitude in recovering from recessions and disinflationary episodes. And already in their first meeting after announcing the new monetary policy strategy last July, observers of the ECB they were able to get a concrete idea of what greater patience is going to mean in practice.
As your chief economist explains, Philip lane, the ECB it updated its guidance on when it will toughen policy: not until inflation reaches (or exceeds!) the 2 percent target “long before the end of its contemplated horizon and in a lasting manner for the rest of the contemplated horizon.” To put it more simply, inflation must reap its head closer in time than under the previous policy strategy to justify monetary tightening (the current contemplated horizon extends to 2023). This is an ingenious way to make patience concrete, it should be easy to understand for citizens, companies and market players, and it solves the doubts you had about how the ECB You can credibly commit to being more “persistent,” a keyword in your strategy review.
That is just one example of what you can do. Powell. There are other options. Under Powell’s leadership, the Fed has become more vocal about the importance of inequality in the economy, including for the effectiveness of monetary policy. The revision of its strategy increased the importance of full employment for monetary policy. You can use this to make “patience” more operational.
The effects of the stimulus on aggregate demand take longer to reach the most marginalized workers, minorities and those with less formal education. So why not include statistics on labor market margins more prominently in the monetary policy recommendation of the Fed, and link future directions to adjust quantifiable full employment on those margins and not just on average? The economic case for this is strong, and there is no better place to advertise it than at a symposium on Jackson hole dedicated to “Macroeconomic Policy in an Uneven Economy”.