Last year there was angst over the escalating US-China trade war and Brexit uncertainty, and Donald Trump lashed out at the President of the Reserve Federal Minister Jay Powell on Interest Rate Policy.
But this year’s macroeconomic challenge is of a very different order, with the IMF forecasting a 4.9% contraction in global production due to the coronavirus, the worst performance since well before the symposium was held in Wyoming earlier in the years. 1980.
Over the past decade, policymakers have periodically worried about the lack of ammunition in a world of low productivity and already inflated interest rates and central bank balance sheets. All of these constraints are urgently being re-examined in light of the pandemic, with governments in advanced countries showing varying degrees of willingness to help monetary policy by increasing spending.
For the first time, the gathering will take place in a completely virtual format, without any of the Tetons jokes or sights that have defined Jackson Hole.
After rushing to craft a massive political response to the initial viral shock that briefly threatened to trigger a financial crisis, the world’s major central banks are facing the next economic phase of the pandemic with a shrinking arsenal of monetary weapons and a growing frustration that some key drivers of the recovery – both health and fiscal – are getting out of hand.
“The initial and most damaging wave of the economic blow may have passed, but other waves may arise and no matter what, the economic scars will be long lasting. Yet political space can shrink, ”said Mark Sobel, former head of the US Treasury and chairman of Omfif, a central bank think tank.
“The Fed and the European Central Bank have run out of ammunition. Even when the advanced economies recover significantly, there will still be a legacy of extremely high unemployment, large output gaps and huge disruptions to deal with, ”he added.
Even as central banks assess their tools to tackle the next stage of Covid, they also face growing questions about the impact of their first round of support – in particular, whether it has inflated the value of risky assets. , technology stocks and housing.
“There is a legitimate concern at this point that we are levitating a bit,” said Robin Brooks, chief economist at the Institute of International Finance in Washington. “The massive increase in debt and forever low interest rates. . . all of these things are of concern from a financial stability perspective. ”
Most central bankers still believe that tackling the disinflationary shock and avoiding further trouble in financial markets is their top priority – and that should show in Jackson Hole.
“It will be different, and of course the informal meeting at the break will not be available,” said Thomas Hoenig, former Kansas City Fed chairman who hosted the past rallies. ” [But] the issues are very, very clear.
Mr Powell’s speech on Thursday will focus on overhauling the Fed’s monetary policy framework – a two-year effort to update its strategy for an era of consistently low interest rates and low inflation.
The review’s findings are still under wraps, but it is generally expected to cement a more permissive approach to inflation and a more aggressive focus on full employment.
But some economists say it just underlines how close the Fed is to the limits of its ability to act.
“The Fed runs into the long-term problem that when things go wrong, they pull on a chord with monetary policy,” said Adam Posen, president of the Peterson Institute for International Economics in Washington.
“You can alleviate the liquidity problems, you can put a floor below certain asset prices, you can stabilize the credit markets, all of this is constructive but none is enough to create a recovery,” added Mr. Posen. .
According to Stephen Stanley, chief economist at Amherst Pierpont, Mr. Powell could disappoint investors if the Fed is seen as inconclusive on the details and timing of its next steps. The markets are “jumping the gun” and “being too tight on timing” when it comes to the policy review, Stanley said.
Meanwhile, the fiscal situation deteriorated after Congress and the White House failed to agree on a deal for additional federal spending that senior Fed officials had sought to encourage.
“The Fed must now shoulder more of the burdens of economic management, given the stalemate in Washington,” said Larry Hatheway, co-founder of Jackson Hole Economics, a private research firm. “Central bankers prefer not to feel that they too are beholden to fiscal policy and increasingly are.
Other major central banks
Bank of England Governor Andrew Bailey will report on the BoE’s review of its monetary framework on Friday.
Mr Bailey is expected to complement this with a discussion of negative interest rates, which has been on the BoE’s agenda since becoming governor earlier this year.
Jagjit Chadha, director of the National Institute for Economic and Social Research in London, said: “We need to know exactly how the Monetary Policy Committee thinks it is communicating the likely path of interest rates, the end point and the uncertainty. ”
Christine Lagarde, president of the European Central Bank, will not speak at this year’s symposium and the ECB will be represented by Philip Lane, the chief economist, who will present the eurozone perspective at a panel on Thursday. The ECB is also conducting a review of its policy, although its conclusion has been postponed until next year due to the pandemic.
Additional reporting by Colby Smith