Financial Review
PUBLISHED: 08 Sept 2012
A week ago, America’s economic glitterati gathered at a resort in Wyoming with the spectacular backdrop of the rugged Grand Teton mountain range.
The Jackson Hole conference, hosted each year by the Federal Reserve Bank of Kansas City, brings together an elite group of central bankers, policymakers, academics and Wall Street economists. It’s America’s answer to Davos, and those who get invited feel very much on the inside of the power elite.
The Federal Reserve chairman is the star, and his address is eagerly anticipated, sometimes revealing a new insight, idea or even policy move. Papers presented by other guest speakers fuel discussions, and new ideas can at times percolate out of the two-day symposium. This year’s meeting was named “The Changing Policy Landscape”.
So what exactly came out of Jackson Hole, 2012? Zilch. At least as far as the Fed is concerned, the policy landscape may change but policy remains the same.
Fed chairman Ben Bernanke spoke about monetary policy since the financial crisis. He extolled the virtues of non-traditional monetary policy tools, namely quantitative easing, whereby the Fed bought up stacks of bonds from institutions and investors. But he stuck to an almost wooden script, announcing no actions but promising that the Fed was ready to do something if needed.
It’s been the same story since the last major round of quantitative easing ended a year and a half ago.
Yet, even as Bernanke spoke, the signs of a weakening economy were evident. Just before his speech, the Commerce Department said second-quarter growth figures for the US economy were revised down to an annual 1.6 per cent from the previously estimated 2.4 per cent. Since then the August data has been weak. New home sales slowed sharply and manufacturing, the lone bright spot post-crisis, contracted for the third month in a row.
The problem is the more Bernanke says the Fed is standing by, the less reassuring he gets. Could somebody remind him of the old adage that actions speak louder than words? With Europe collapsing and the US in stagnation, the Fed is the invisible man of the global economy.
Bernanke knows that by law he has a dual mandate: to promote price stability and full employment. Price stability isn’t a problem, but employment is far from where it should be. Setting aside economics entirely, there’s a legal requirement for Bernanke to act that he’s been simply ignoring.
And when you consider the economics, continued Fed inaction borders on the reprehensible.
Labour economists recognise that an extended period of high unemployment results not only in a short-term, dead-weight loss of economic output, but a long-term destruction of skills and earning potential that will haunt the economy for years. The US needs action now.
Some observers call for a third round of quantitative easing, a so-called QE3. But with $US2 trillion in bonds already sitting on the government’s books, others are concerned about the costs. That’s because when the Fed bought those bonds it printed the money to pay for them out of thin air. As a result the Fed isn’t lifting another finger.
It doesn’t have to be this way. There are other potentially far less expensive tools. To take one example, a paper presented at Jackson Hole by Columbia University economist Michael Woodford argues the Fed could nudge the economy without spending any money at all.
Woodford analysed the options central banks have for boosting the economy when interest rates sit about as low as they can go, near the so-called “zero bound”. He focuses on two areas.
The first he calls forward guidance. By that he means explicit statements by the Fed about the outlook for future monetary policy. The second he calls balance sheet actions. That’s when the central bank changes the size or composition of its balance sheet, for example through quantitative easing.
Woodford suggests that the more effective approach is to change future inflationary expectations. The Fed could help the economy by making an explicit promise to hold off on interest rate increases even after a stronger recovery takes hold.
That would signal that while inflation remains low now, the Fed will tolerate a bit more once the economy gets going. Woodford reasons that this would actually be more effective than further quantitative easing.
The beauty of Woodford’s argument is it doesn’t cost anything. If the Fed embarks on a publicity campaign to change inflationary expectations and it doesn’t work, the Fed can change its tune. Isn’t that exactly the role of the Fed chairman, to communicate with the public?
Whether you buy Woodford’s argument or not there are surely things the central bank can be doing instead of sitting on its hands. With so much destruction caused by high unemployment, it’s past time for the Fed to take the lead.
PUBLISHED: 08 Sept 2012
Anna Bernasek
A week ago, America’s economic glitterati gathered at a resort in Wyoming with the spectacular backdrop of the rugged Grand Teton mountain range.
The Jackson Hole conference, hosted each year by the Federal Reserve Bank of Kansas City, brings together an elite group of central bankers, policymakers, academics and Wall Street economists. It’s America’s answer to Davos, and those who get invited feel very much on the inside of the power elite.
The Federal Reserve chairman is the star, and his address is eagerly anticipated, sometimes revealing a new insight, idea or even policy move. Papers presented by other guest speakers fuel discussions, and new ideas can at times percolate out of the two-day symposium. This year’s meeting was named “The Changing Policy Landscape”.
So what exactly came out of Jackson Hole, 2012? Zilch. At least as far as the Fed is concerned, the policy landscape may change but policy remains the same.
Fed chairman Ben Bernanke spoke about monetary policy since the financial crisis. He extolled the virtues of non-traditional monetary policy tools, namely quantitative easing, whereby the Fed bought up stacks of bonds from institutions and investors. But he stuck to an almost wooden script, announcing no actions but promising that the Fed was ready to do something if needed.
It’s been the same story since the last major round of quantitative easing ended a year and a half ago.
Yet, even as Bernanke spoke, the signs of a weakening economy were evident. Just before his speech, the Commerce Department said second-quarter growth figures for the US economy were revised down to an annual 1.6 per cent from the previously estimated 2.4 per cent. Since then the August data has been weak. New home sales slowed sharply and manufacturing, the lone bright spot post-crisis, contracted for the third month in a row.
The problem is the more Bernanke says the Fed is standing by, the less reassuring he gets. Could somebody remind him of the old adage that actions speak louder than words? With Europe collapsing and the US in stagnation, the Fed is the invisible man of the global economy.
Bernanke knows that by law he has a dual mandate: to promote price stability and full employment. Price stability isn’t a problem, but employment is far from where it should be. Setting aside economics entirely, there’s a legal requirement for Bernanke to act that he’s been simply ignoring.
And when you consider the economics, continued Fed inaction borders on the reprehensible.
Labour economists recognise that an extended period of high unemployment results not only in a short-term, dead-weight loss of economic output, but a long-term destruction of skills and earning potential that will haunt the economy for years. The US needs action now.
Some observers call for a third round of quantitative easing, a so-called QE3. But with $US2 trillion in bonds already sitting on the government’s books, others are concerned about the costs. That’s because when the Fed bought those bonds it printed the money to pay for them out of thin air. As a result the Fed isn’t lifting another finger.
It doesn’t have to be this way. There are other potentially far less expensive tools. To take one example, a paper presented at Jackson Hole by Columbia University economist Michael Woodford argues the Fed could nudge the economy without spending any money at all.
Woodford analysed the options central banks have for boosting the economy when interest rates sit about as low as they can go, near the so-called “zero bound”. He focuses on two areas.
The first he calls forward guidance. By that he means explicit statements by the Fed about the outlook for future monetary policy. The second he calls balance sheet actions. That’s when the central bank changes the size or composition of its balance sheet, for example through quantitative easing.
Woodford suggests that the more effective approach is to change future inflationary expectations. The Fed could help the economy by making an explicit promise to hold off on interest rate increases even after a stronger recovery takes hold.
That would signal that while inflation remains low now, the Fed will tolerate a bit more once the economy gets going. Woodford reasons that this would actually be more effective than further quantitative easing.
The beauty of Woodford’s argument is it doesn’t cost anything. If the Fed embarks on a publicity campaign to change inflationary expectations and it doesn’t work, the Fed can change its tune. Isn’t that exactly the role of the Fed chairman, to communicate with the public?
Whether you buy Woodford’s argument or not there are surely things the central bank can be doing instead of sitting on its hands. With so much destruction caused by high unemployment, it’s past time for the Fed to take the lead.
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