The Jackson Hole Valley at the foot of the Rocky Mountains is a place of myth and power. The most important central bankers and economists have been meeting here to discuss monetary policy since the early 1980s. The messages that they sent out into the world from here moved the markets and the economy worldwide, decided about the ups and downs, about inflation, interest rates and wealth.
This year, however, this shine of power is missing, you can rather feel powerlessness. Not because the meeting is virtual this year. US Federal Reserve Chairman Jerome Powell sent two messages on Thursday: the precise control of inflation – the usual inflation target is two percent – will be abandoned. In the future, the inflation rate may be below or above it, that is accepted (the Fed is aiming for higher inflation anyway). And interest rates will remain very low for years. You could also put it in a message: We’re giving up.
Benevolent observers rate the speech as pragmatic realism or as an overdue adaptation to a new era. The Financial Times welcomes the “welcome evolution of inflation” and states that Powell has broken with tradition. However: “This development was urgently needed.” The inflation target is outdated, because it traditionally served to control the expectations of companies and consumers and to give them a framework for their decisions.
The “Financial Times” also noted a large “Mea culpa” by Powell, which the critics put in the foreground. Because the tectonic shift that Powell announced has a history: Central banks around the world have missed their inflation targets for years. So we’re talking about an admission, some say: a surrender. To put it bluntly, it looks like Nokia is making a big announcement that it will give up its leadership in the cell phone market. The Wall Street Journal describes the speech as a “major shift”, but states that there will be no major change in policy – because it is already integrated into the actions of the Fed.
And so some observers were also more critical: “The Fed is at the end of its tether”, noted the US news agency “Bloomberg”. She got stuck, her way out was “to talk a good game”. In fact, the most powerful central bank in the world is now formally lining up, officially sharing the impotent reality of the European Central Bank (ECB) and the pioneer Japan. This reality means: interest rates are low, zero, or negative, bond purchases are in full swing – and growth remains low or the economy stagnates.
There is, however, one difference that is perhaps a glimmer of hope: For years, at least in Europe, monetary policy has not been adequately flanked by fiscal policy, i.e. by government spending. That has changed decisively in Europe, thanks to the EU’s 750 billion euro fund, but also due to an expansive policy in the most important economies, first and foremost Germany. The ECB is no longer the lonely actor holding the business together.
There is no formula for growth
Whether that will be enough to start normalizing monetary policy in a few years is completely open. This depends not only on the course of the pandemic, but on growth in those countries that had to struggle with many problems before Corona. There will have to be painful reforms there.
Because while interest rates remain low and debts are rising exorbitantly, one thing above all is missing: the formula for growth. In other words: It would be desirable if the economy got hot again or even overheated and jobs were created. And the central bank, that was the message this week, would then let inflation run for now. Freely adapted from Helmut Schmidt: Better five percent inflation than five percent unemployment.
So there remain some question marks. And we’ll have to wait a few years for Jackson Hole to be a place full of glamor, myth and power again.
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