(Bloomberg) — The world’s top central bankers have stressed the need to keep interest rates high until inflation is contained — and are grappling with deeper economic shifts that will make their jobs harder.
Most Read from Bloomberg
At the Federal Reserve’s annual meeting in Jackson Hole, Wyoming, keynote speeches by Federal Reserve Chair Jerome Powell and European Central Bank President Christine Lagarde on Friday outlined the challenges they each face in deciding whether they should extend their historic strings of interest rate hikes. I started last year. At the same time, they gave investors little clue as to whether they would actually do so in the coming months.
Bank of England Deputy Governor Ben Broadbent said in a Saturday session at the conference, hosted by the Federal Reserve Bank of Kansas City in the heart of Grand Teton National Park, that interest rates in the United Kingdom may have to rise further, while Bank of Japan Governor Kazuo reiterated Ueda reiterated the continued need for lower rates there.
The main topic that emerged from the official conference proceedings and the talks that took place on the sidelines of the conference was the difficulties in adapting to forces outside the control of the monetary authorities. Attendees discussed topics including productivity and innovation, bond market structure, global supply chains, and rising levels of public debt.
“These structural shifts that we’ve heard about, we all know they’re important. We all know they’re big. Central banks can’t do much about a lot of them,” said Christine Forbes, professor of economics at MIT and former policymaker at the Bank of England.
“It changes the parameters of how monetary policy is set, which makes it very difficult to operate,” she added.
The Fed and the European Central Bank are in a similar debate about whether they should raise borrowing costs at their policy meetings next month, even as the US economy surprises with its resilience while Europe’s economy appears headed for decline. Persistent inflation in both jurisdictions and uncertainty about how quickly it will recede is a common challenge.
Powell, in his speech, remained vague on whether the Fed would raise the benchmark interest rate again, though he warned that “additional evidence of sustained above-trend growth could jeopardize further progress on inflation and could call for further tightening.” Monetary Policy.
Lagarde, in her speech and in a subsequent interview with Bloomberg Television, was more broad in discussing the new landscape facing ECB policymakers, one characterized by new challenges arising from historical changes, including the energy transition and the fragmentation of global trade into competing geopolitics. blocks. However, she too has shied away from talking about decisions in the coming months.
Nevertheless, Powell and Lagarde’s colleagues did not hesitate to give their opinion on the issues for and against additional interest rate increases. In interviews, some – such as Cleveland Fed President Loretta Mester and Bank of Latvia Governor Martins Kazacs – have argued that it is better to err about raising interest rates, which can be reversed if necessary.
Others, including Philadelphia Fed President Patrick Harker and Bank of Portugal Governor Mario Centeno, have taken the opposite side, calling for a cautious approach as they assess the impact of past hikes.
The resilience of the US economy has investors and economists debating whether the neutral interest rate — where the policy neither slows nor speeds up the economy — has shifted higher. This means that policy makers need to raise interest rates further to curb inflation.
But despite speculation that Powell will use his highly anticipated speech to make his point, the goal was not in doubt at the symposium, except for the Fed chair’s assertion that policymakers can’t set the rate with certainty. This was a departure from last year, as some economists said that advanced economies are entering a new reality and therefore the target should be raised to account for this.
Among the issues that punctuated the discussions over the weekend was trade. A variety of factors have caused trade in many developed markets to move away from traditional partners such as China, to countries such as Vietnam or Mexico. Some economists believe that this “convergence” or “convergence” can increase inflationary pressures.
“When you start introducing these kinds of frictions, it makes large sectors of the economy less sensitive to monetary policy,” said Kathryn Ross, a professor of economics at the University of California, Davis, who presented a discussion of a paper on supply. chains.
Ross said these emerging trends in trade are making economies less resilient to non-geopolitical shocks and increasing the need for stabilization through monetary policy. “I think there are really big challenges for monetary policy if we and other countries continue to pursue that,” she said.
Policymakers also faced a ballooning budget deficit, including its impact on the performance of the treasury market. Market turmoil during the early days of the pandemic fueled calls from policymakers and economists for infrastructure and regulatory reforms.
The dominant sentiment in the conversations and questions at this year’s symposium is: the need for humility amid the uncertainty of the current landscape.
“While we need to continue striving to improve our image over the medium term, we must also be clear about the limits of what we currently know and what our policy can achieve,” Lagarde said. “If we are to maintain our credibility with the public, we will need to talk about the future in a way that better reflects the uncertainty we face.”
Most Read from Bloomberg Businessweek
©2023 Bloomberg LP