The Federal Reserve Bank of Kansas City’s Economic Policy Symposium in Jackson Hole, Wyoming, is well-known as one of the longest-standing central banking conferences in the world.

The theme for this year’s conference, which took place on August 25-27, was ‘Re-assessing Constraints on the Economy and Policy’.

Apart from several leading academicians, there was a galaxy of leaders from the world of finance and banking.

Naturally, there was huge expectation, from market participants to the public, that the deliberations will throw some light on the future of monetary policy actions and inflation trajectory in these uncertain times.

A reading of some of the comments/papers at the symposium gives one an impression that clarity about future monetary policy seems to be eluding us.

Take the opening remarks of Fed Chairman Jerome Powell.

He specifically, commented, “Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance”. Going forward he highlighted three lessons.

First, central banks can and should take responsibility for delivering low and stable inflation.

Second, inflationary expectations tend to play an important role in setting the path of inflation over time.

Third, any delay in bringing down inflation could increase the employment costs; after all, the more the policymakers wait, more “high inflation becomes entrenched in wage and price setting”.

Growth pangs

The upshot is perhaps as follows — economic agents all over the world need to get used to “a sustained period of below-trend growth” in the US.

Interestingly, at the same Jackson Hole conference last year, Powell had commented that inflation was transitory.

Commenting that the existing economic models with a flat Phillips Curve (that is, the inflation-unemployment/output trade-off) cannot explain the current inflation surge, Gita Gopinath, First Deputy Managing Director of the IMF, highlighted the roles played by factors such as (a) aggressive monetary and fiscal stimulus during the peak of the pandemic; (b) the massive rebound of demand for goods along with the reduced impact of the severity of the pandemic; (c) surging energy prices since the Russian invasion of Ukraine; and (d) pandemic-induced reduced potential labour demand and supply.

The helplessness of monetary policy, in general, and of “forward guidance” (whereby a central bank gives a hint about the future trajectory of monetary policy) comes out clearly when she says, “… policymakers might well seek to push unemployment below the natural rate but should be more cautious about calibrating policy to generate a deep and persistent undershoot. Forward guidance should also be accompanied by more explicit ‘escape clauses’ to deal with the risk that inflation rises more than expected”.

When it comes to emerging market (EM) economies, Gopinath noted a much broader role of the fiscal stance in forming inflationary expectations, and a broader concern that “EM central bank independence is less secure than advanced economies”.

Agustin Carstens, Chief of Basel-based Bank for International Settlement (BIS), emphasised the turnaround in the roles played by geopolitics (that is, the less favourable stance of the political establishment favouring globalisation), globalisation (e.g., narrowing of comparative advantage between the rich and the poor trading nations), and demographics (e.g., retiring baby boomers and the relative scarcity of labour) in global growth and inflation.

He pointed out that some of the supply side factors, which used to play the role of tailwinds in fostering global growth and moderating inflation earlier have now turned into headwinds.

Looming uncertainty

Quoting Voltaire (“uncertainty is not a pleasant condition, but certainty is absurd”) and Bertrand Russell (“not to be absolutely certain [is] one of the essential things in rationality”), the Governor of Bank of France emphasised the need for reconciling uncertainty and rationality in effective implementation of monetary policy — a task that is easier said than done.

Isabel Schnabel, Member of the Executive Board of the ECB, also emphasised the painful transition from a period of great moderation to a period of great volatility.

All these comments are perhaps indicative of the helplessness on the part of the advanced central bankers. It also calls for more effective central bank communication. RBI Governor, in a September 5 speech, ) said, “The recent commentary from the US Fed at Jackson Hole on the future trajectory of US monetary policy has infused substantial volatility into global financial markets, with large spillover and knock-on effects on emerging market economies (EMEs).”

This episode is yet another demonstration of a point made by these writers earlier that while forward guidance can be a useful policy instrument in an accommodative monetary policy phase, it can be quite difficult to provide coherent and consistent guidance in a tightening cycle. “...Central bank communication in the current context has thus become even more challenging than the actual policy actions”.

Spillover effects

At the current juncture, the US monetary posturing is having a strong spillover all over the world. With hardening US interest rates and persistent threat of more hikes, there is a strong outflow of capital from most countries.

This is pushing the value of these currencies down vis-à-vis the US dollar. A depreciating currency implies higher bills for food and fuel for the net importers of these commodities.

Consequently, countries are forced to push up their own rates of interest to avoid currency depreciation and imported inflation.

A case in point is the recent 75-basis point increase in interest rate by the European Central Bank. It appears that in a world of free capital flows and high energy prices, helplessness of monetary policy is looming large.

Also, independence of monetary policymakers all over the world would depend not only fiscal excesses but also of ultra-tight US monetary policy. Jackson Hole’s papers/comments perhaps illustrate this challenging role of central banks on future policy actions.

Ray is Director, National Institute of Bank Management, Pune; and Pal is Professor of Economics at the IIM, Calcutta. Views are personal

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