Jackson Hole
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As a native of Colorado, I find the iconic majesty of the Grand Tetons especially stirring. In the past, I’ve been fortunate to attend the Federal Reserve Bank of Kansas City’s Economic Policy Symposium with my family at Jackson Hole. This year, I covered it from afar. I miss the conversations under the stars on the back porch at Jackson Lake Lodge, but I also enjoy delving into the heart of the conference - the economic papers presented by carefully curated experts on a new theme each year. Full agenda and links to papers are here. All are well worth your time, but I will highlight a few that caught my interest on global supply chains and international debt.
The State of Play - Monetary Policy
The media focus this weekend was on the only part of the meeting that was online, the opening remarks of Jay Powell. They were short, no questions, and totally expected, unlike last year when markets were roiled by the Fed chair’s promise to fight inflation with all guns blazing. Although he reiterated the 2% inflation target at least twice, the rest of Powell’s speech focused on the Fed’s achievements in combating inflation, layered with descriptions of uncertainties and lags in data. “We are navigating by stars under cloudy skies." A victory tour combined with humility about the future.
The luncheon speech by European Central Bank head Christine Lagarde, Policymaking in an age of shifts and breaks also invoked the need for humility:
We rely on past regularities to understand the distribution of shocks we are likely to face, how they will transmit through the economy, and how policies can best respond to them. But if we are in a new age, past regularities may no longer be a good guide for how the economy works.
The Dual Mandate & the 2% Target
The ECB and all other central banks save one have a single mandate, price stability. The US Federal Reserve alone has a dual mandate, price stability and employment. Although rooted in post-war politics and the desire to put WWII veterans to work, the dual mandate did not become explicit until the late 1970’s-it is a relatively recent phenomenon, not a foundational requirement.
In early 1975, Congress adopted Resolution 133 instructing the Federal Reserve to, among other things: Maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates.
The Federal Reserve’s “Dual Mandate”: The Evolution of an Idea, Aaron Steelman, Federal Reserve Bank of Richmond, 2011
The Humphrey-Hawkins Act of 1977 also focused on employment, and set a goal of 4% unemployment and 3% inflation. Yes, a 3%, not a 2% inflation target. Obviously neither could be legislated into reality, and the dual mandate was challenged a few years later when Paul Volcker raised interest rates to combat high inflation, which immediately increased unemployment. Volcker rationalized this to Congress in much the way that Powell has, saying that winning the battle against inflation might cost jobs, but will have the eventual benefit of increasing employment based on price stability.
It could be that both the current 2% inflation target and direct support of employment are no longer useful and should be reviewed. Japan is still on the dark side of 2% and Governor Kazuo Ueda, who attended his first Jackson Hole meeting as head of the Bank of Japan, has declared his intention not to raise rates in the near future.
My takeaway based on the remarks of all three central bank governors is that monetary policy is on hold for now. If Friday’s unemployment numbers show the effects of tighter monetary policy, the US could be on hold for some time.
Debt vs Growth
Policymakers around the world are trying to come to terms with the consequences of higher interest rates on global debt. In Living with High Public Debt, Serkan Arslanalp and Barry Eichengreen discuss the prospects for paying debt through growth, especially in emerging markets:
Faster global growth is pleasant to imagine but difficult to engineer.
Forecasting growth is even harder. But if growth slows, higher debt levels are going to mean that higher interest rates will persist. We might stay where we are for some time.
A lot of food for thought this year, but given the impact of China’s new policies on the structure of the global economy, I thought it would have been terrific if someone from the People’s Bank of China had presented at Jackson Hole. PBOC’s new head, Pan Gongcheng, has just started his new job, and China is in the midst of a major economic challenge. Governor Ueda however made the point that China is here to stay.
Supply Chains & FDI
Here is one of the slides from Governor Ueda’s presentation. China is a second in priority to North America in terms of Japan’s direct investment. This does not look like decoupling.
Another presentation, Global Supply Chains: The Looming “Great Reallocation” by Laura Alfaro and Davin Chor, emphasized the difference between intent and actions taken by companies to lessen their dependence on China.
Instead, shifting operations to Vietnam and Mexico has resulted in increased investment by China in those countries to invest in production facilities. No net loss to China.
What about India? If India is replacing China as a supply chain hub, it is not showing up in oil demand, which is lagging in India.
Happy Trails
There is something about the combined intimacy and grandeur of the setting that makes Jackson Hole over a few days in August the highlight of the year for central bankers. The ghost of Paul Volcker hangs over the conference, which attracted him as a devoted fly fisher. But here’s hoping that we never see a prime rate of 21.5% again.
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