Jackson Hole 2023: Central bankers worry about the impact of structural shifts in the global economy

Inflation

It is that time of the year again when global central bankers and key economic thinkers travel to Wyoming in the United States to discuss crucial matters pertaining to global economics. In August every year, the Jackson Hole conference hosted by the Kansas City Federal Reserve attracts top economics brains from around the world. The conference opens with remarks from the Chair of the Board of Governors of the Federal Reserve System. The opening remarks are followed by papers and discussions that set the agenda for macroeconomic policy in the future.

Every conference is based on a theme. This year’s theme was ‘Structural Shifts in the Global Economy’. The conference webpage explains that “this year's theme will explore several significant, and potentially long-lasting developments affecting the global economy”. Economies are getting restructured post-pandemic due to shifts in trade networks and changes in global financial flows.

Hawk-eyed On Inflation

In his opening remarks, Fed chair Jerome Powell stated that his message was the same as last year: The Fed remains focused on bringing inflation down to its 2 percent goal.  He stated that the headline inflation had come down from the 7 percent level in June 2022 to the level of 3.3 percent in July 2023. Core inflation (which excludes volatile food and fuel prices) declined from 5.4 percent to 4.3 percent in the same period. Within core, there was a decline in prices of durable goods as pressures on supply chains eased post-pandemic. However, the decline in housing and non-housing services (healthcare, food, transportation etc.) was modest.  While inflation had declined in the last few months, Powell cautioned that not much should made of the readings of the last few months.

On the economic outlook, Powell mentioned that despite significant tightening of interest rates, growth remained buoyant. The two-year interest rates have increased by 250 basis points (bps) and long-term interest rates by 150 bps. Such a sharp tightening should have led to slower growth in GDP and thereby inflation, but that had not happened. The growth rates have remained above expectations, and if it continues, moderating inflation to the 2 percent level will take more time.

In terms of the labour market, the rebalancing of demand and supply was continuing. While demand for labour moderated, the supply improved as immigrants rejoined the workforce post the pandemic. The rise in supply and fall in demand eased the wage pressures. While nominal wages moderated, real wages rose due to falling inflation. The rising real wages could lead to higher spending and feed into higher inflation. The Federal Reserve would hope that demand for labour declines further such that wage pressures do not feed into inflation. Until then, it will “call for a monetary policy response”. With these words, Powell has indicated that the Fed could increase the policy rates.

Supply Shock Worries

Central bankers of both the Euro area and England shared their views on monetary policy in their respective regions. Christine Lagarde, President of the European Central Bank argued that the economies will face larger supply shocks due to climate change and trade fragmentation, which would lead to both higher global inflation and higher investments to mitigate these risks. Post-pandemic, workers were demanding higher wages due to rising inflation. In these times of shifts and breaks, Lagarde said that monetary policy should have three elements: “clarity, flexibility and humility”.  Clarity means the objective of monetary policy should be clear. The policy should also be flexible and adapt to changing economic outlook. Humility means we should set limits on what we know and what the policy can achieve. She ended her remarks by adding that there is “no pre-existing playbook for the situation we are facing today — and so our task is to draw up a new one”.

Bank of England Deputy Governor Ben Broadbent stressed on how the recent shocks have created problems for open economies like the United Kingdom. An open economy is more dependent on the global economy for its growth compared to a closed economy. The pandemic and the Russia-Ukraine war led to a sudden contraction in international trade in goods leading to very high imported prices and inflation. Broadbent believes that it will take time for inflation to come back on the target, “monetary policy may well have to remain in restrictive territory for some time yet”.

To sum up, the lesson from Jackson Hole is clear: inflation still remains a concern. The central bankers of all three major economies remain concerned about inflation. There is another lesson from the Jackson Hole conference that is often missed: Reach out to policymakers from the developing world too. One conference participant was World Trade Organization Director-General Ngozi Okonjo-Iweala. She showed that trade diversification reduces macroeconomic volatility by expanding sources of supply and demand. Policymakers from the developed world have emphasized that there are bigger worries over the long-term impact of the structural shifts in the global economy. Given the challenges, inviting policymakers from developing economies is highly critical towards building a comprehensive dialogue. It is high time that the organisers of the Jackson Hole conference shed their developed world mindset.

Amol Agrawal teaches at Ahmedabad University. Views are personal, and do not represent the stand of this publication.