Tomorrow’s Jackson Hole symposium is the year’s most significant event in the central banking community calendar. Whenever the world’s central bankers meet in the Wyoming mountains — or, these days, e-meet — they often take the opportunity to set out important developments in the way they think about and practise monetary policy. Policymakers’ Jackson Hole speeches — especially the keynote by the Federal Reserve chair — are a key source for insight into what will come next, in the economy and in policy. This year’s symposium comes at a particularly propitious time for providing such insight.
It goes without saying that we are in an unprecedented economic situation, especially in the US. Monetary policy has never been looser. Fiscal policy has probably never been more stimulative, at least not outside of wars. We have never before consciously locked down entire economies to combat a pandemic, and have therefore never experienced recovering from them. And all of this comes on top of long-term changes in the economy that were forcing profound rethinking of how to do economic policy even before the pandemic. The economy is much harder to predict, and policy much harder to plan, than usual.
In particular, there is deep theoretical and empirical disagreement about the benefits and risks of “running the economy hot” (the New York Times’s Neil Irwin lays out the debate nicely). The cause and consequence of this debate are that we simply do not know whether the economy is more likely to respond to today’s unprecedented aggregate demand stimulus with growth or with inflation.
On top of this underlying uncertainty come fluctuating short-term signals — about the health of the US recovery against the rising Delta coronavirus infections, and about what members of the Fed’s policy-setting committee themselves think should be done.
Still, we need to make choices based on what we think will happen — and “we” includes investors with money at stake in markets, businesses and workers doing their best to guess demand for their products and their labour in the years ahead, and the Fed itself. The task of its chair, Jay Powell, tomorrow is to help make those choices as informed as possible.
As Mohamed El-Erian puts it in an opinion article for the Financial Times, “a consequential number of people await to hear what only Powell can deliver — when and how the Fed will pivot away from the Covid-related emergency measures introduced at the start of the pandemic. Recent economic data accentuate the need for clarity on this.”
As El-Erian also notes, Powell’s “preference for a slow and finely graduated evolution in policies” is well known. It is not, however, well or fully understood. The Fed’s strategy shift last year was towards a more patient approach to economic expansions, raising the threshold for tightening as the economy nears its full capacity. What everybody else — and arguably the Fed itself — needs now is a clearer sense of where that threshold is.
I don’t think, however, that this means a detailed guide to the when and how of “tapering” — that is to say the end and ultimately the reversal of the Fed’s purchases of financial securities to loosen financing conditions. Instead, I think what Powell needs to provide is something more broad-brush but still useful. Given the Fed’s tilt last year to a more patient approach to economic expansions, what is needed is a more fine-grained explanation of what patience means for the Fed.
The European Central Bank has set an instructive 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 recoveries from downturns and disinflationary episodes. And as early as its first meeting after announcing the new monetary policy strategy last July, ECB watchers could get a concrete sense of what greater patience would mean in practice.
As its chief economist Philip Lane explains, the ECB has updated its guidance on when it will tighten policy: not until inflation reaches (or exceeds!) the target 2 per cent “well ahead of the end of its projection horizon and durably for the rest of the projection horizon”. Put more simply, inflation must rear its head closer in time than under the previous policy strategy to justify monetary tightening (the current projection horizon runs until 2023). This is a neat way to make patience concrete, should be easy to understand for citizens, businesses and market actors, and addresses doubts I had about how the ECB could credibly commit to being more “persistent” — a key word in its strategy review.
That is just an illustration of what Powell could do. There are other options. On Powell’s watch, the Fed has, for example, become much more vocal about the importance of inequality in the economy, including for the effectiveness of monetary policy. Its strategy review upgraded the importance of full employment for monetary policy. It could use this to make “patience” more operational.
The effects of aggregate demand stimulus take longer to reach more marginalised workers — minorities and those with less formal education. So why not include statistics on the margins of the labour market more prominently in the Fed’s monetary policy recommendation, and tie forward guidance for tightening to quantifiably full employment on those margins and not just on average? The economic case for this is solid — and there is no better place to announce it than a Jackson Hole symposium dedicated to “Macroeconomic Policy in an Uneven Economy”.
Other readables
My economic take on Afghanistan is that by fuelling corruption and failing to secure more prosperous lives for all Afghans, the US-led coalition neglected a winnable peace. That does not mean nothing has improved over 20 years — on the contrary, as the FT charts here show, a lot of things got better, though from a very low initial level. The country’s exiled central banker writes for the FT about its looming economic challenges.
The debate among Free Lunch readers over cross-country productivity differences continues. Many readers in Canada have informed me that self-checkouts are ubiquitous in their supermarkets, at least in the bigger cities — but that they tend to coexist with a preference for employing sometimes low-skilled labour at manual tills.
Separately, Ulrich, another reader, writes that “Hugh’s example on coffee at motorway service areas . . . might be more a sign of national tastes than economics. Germans for a long time preferred filter coffee, which can be done easily with self-service coffee machines. The trend to barista-made coffee started in England earlier, maybe because the incumbent option was instant coffee. Over the last years however, you see more and more barista-staffed coffee bars in German motorway service stations.”
Keep the comments coming!
Numbers news
In a rare bipartisan effort, the US government has forced hospitals to publish the prices they negotiate with private health insurance plans. The New York Times has gone through the data, and the price variations are nothing short of astounding. The US healthcare market is utterly broken: neither buyers nor sellers seem to know the prices by which market efficiency should in theory be guided.
The IMF has created global helicopter money by issuing $650bn worth of special drawing rights, available for use between central banks. IMF managing director Kristalina Georgieva writes in the FT how she thinks they should be deployed.
Source: Economy - ft.com
