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Policy | Are central bankers staring at a bigger hole for economies?

Each of the Jackson Hole symposiums since 2008 has led to more questions than answers

April 27, 2020 / 01:16 PM IST

Amol Agrawal

It is that time of the year when central bankers and a few select economists get together at Jackson Hole, Wyoming, in the US for one of the most sought-after economics conferences in the world.

Each conference has a theme and for 2019, it is ‘Challenges for Monetary Policy’. There could not be a more appropriate title as the world economy is again in turmoil. With governments increasing turning nationalist and unwilling to play a global supporting role, the onus has come onto central bankers to rescue not just their economies but the global economy too.

Apart from this, 2019 marks several anniversaries of globally significant events: 100 years of World War-I, 90 years of the advent of Great Depression, 80 years of the signing of the Germany-Russia pact which led to the start of WW-II, 75 years of establishing the IMF/World Bank (see earlier piece), 20 years of Euro (earlier piece) and we have just finished 10 years of 2008 crisis. Historians are finding parallels with each of these events, making it doubly tough for policymakers to keep things optimistic.

Amid all this, global growth rates are being revised lower and inflation remains lower than targets. The US government is engaged in a trade war with China which has lowered growth rates globally and uncertainty abounds. Policymakers do not have ammunition to fight the ongoing slowdown compared to the 2008 crisis as policy rates are already low and most of these countries have high public debt levels, making it difficult for fiscal policy to play a role.


In his inaugural speech, Chair of the Federal Reserve, Jerome Powell, reflected on US economic history since WW-II and divided it into three phases.

The first was the Great Inflation (1950-82) which required then Fed chair Paul Volcker to tighten policy significantly to bring inflation under control.

The second phase (1983-2009) started with the Great Moderation, which saw higher growth and low inflation, with Fed chair Alan Greenspan’s policies seen as crucial to this much-wanted economic combination. However, it ended with the great recession which questioned Greenspan’s legacy and required the Fed under Bernanke to act decisively to stall the crisis.

The third phase is the ongoing one, which gives conflicting signals and has seen three Fed chairs: Bernanke, Yellen and Powell. On the one hand, US economy is in its 11th year of expansion, the longest on record, with lowest unemployment rates in a long time and inflation around target levels.

On the other hand, the probability of the US heading to recession is increasing with every passing day. The yield curve has inverted (earlier piece) and risks to financial instability have increased once again (earlier piece).

This has pushed the Fed to cut its policy rates. The central bank has been under immense pressure from President Donald Trump who keeps tweeting against its monetary policy.  Even after Powell’s speech, Trump tweeted expressing his displeasure with the central bank and its chief.

Experts say the policy rate cuts were mainly due to this pressure and have questions on the Federal Reserve’s autonomy. It is rather unfortunate that the US President is openly creating rifts between the government and the central bank. There are ways in which differences can be sorted but pressuring the central bank in this manner is surely not one of them.

In another speech, Mark Carney, Governor of Bank of England, explained future policy via a game of cards. In the short run, play the cards as they have been dealt in the best manner possible. This means central banks coordinate, stick to their inflation targets and allow flexible exchange rates to adjust for external shocks.

In the medium term, we should shuffle the deck and manage financial instability and capital flows in a non-disruptive manner. In the long term, we need to change the game. He questioned the continued hegemony of the dollar (USD) despite the decline of the US economy in the overall global share.

He cautioned against replacing USD with another hegemonic currency such as Chinese Renminbi as we are living in a multipolar world. We should instead think of opportunity from new currency technologies, including Libra, he said.

One conference theme which caught my attention was ‘What Does It mean to be a Data-Dependent Central Banker?’ RBI Governor Shaktikanta Das in his first monetary policy press conference in February 2019 stressed on the word ‘data dependent’ multiple times. Perhaps, central bankers are using this term increasingly to signal governments that their policies are based on  incoming data and not on the whims and fancies of the officials.

In this context, Prof Valerie Ramey of University of California said being data dependent was not enough as data alone is not enough to drive policy. A more appropriate term is “conditions-dependent” where decisions are based on the state of the economy which includes current data, revised data and understanding of the economic conditions that are uncertain. Central banks should communicate their conditions-dependent policy to market participants as it will then put attention on each point of data, as is the case today.

From India’s point of view, another conference theme of ‘Monetary Policy Spillovers to Advanced and Emerging Market Economies’ was relevant. The researchers in this theme suggested that monetary policy changes in the US impact emerging markets adversely, but cannot be managed by limiting exchange rate volatility. Instead, there is a need to improve institutional quality such as central bank independence and focus on macroprudential tools to limit the impact of excessive volatility in capital flows.

To sum up, each of the Jackson Hole symposiums since 2008 has led to more questions than answers. The 2019 one was no different with central bankers trying to preside over several problems facing world economies. They would heed the words of the great macroeconomist, Rudiger Dornbusch (quoted by Mark Carney), “In economics, things take longer to happen than you think they will, and then they happen faster than you thought they could”.
Amol Agrawal

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