Some years ago I wrote an oped for the Financial Times the byline of which ran ‘Jackson Hole offers a chance for central banks to hand over baton – It is time for central banks to let governments take on more of the burden of economic policy’. That I could reprint the same article today says much less about my foresight and much more about the stopped clock of international economics and finance, the COVID crisis notwithstanding.
Central banks should long ago have stepped back from generously providing stimulus to economies and markets, particularly as the economic impact of quantitative easing (QE) is diminishing as the world gets to grips with the COVID crisis, if not negative in terms of the effect of negative interest rates in banking systems, and notably on inequality.
This issue has in particular been discussed at the virtual Kansas Federal Reserve ‘offsite’ at Jackson Hole, Wyoming. The event has become one of the more important platforms for central bankers, due in little part to its proximity to decent fishing.
Legend has it that up to the early 1980’s the Kansas Fed struggled to attract participants to its annual conference but came up with the idea of hosting it in Jackson Hole, because the prospect of excellent trout fishing might lure then Fed Chairman Paul Volcker (a keen fisherman) to the conference. The strategy worked and Jackson Hole gathering is now internationally famous and attracts many professional central bankers, whose pronouncements are closely followed by markets. Never before has trout played such an important role in central banking.
The topic of this year’s symposium was inequality, much of which (wealth inequality) has been drive by generous Fed policy, though Fed officials seem to be able to keep a straight face when talking around this.
1999 over again?
To this end, the Fed symposium and the market environment echo previous Jackson Hole gatherings such as one in 1999, when the likes of Mervyn King, Alan Greenspan and late economists and central bankers like Wim Duisenberg, Rudiger Dornbusch and Martin Feldstein gathered to discuss ‘New Challenges for Central Banking’.
Their debates, which occurred in the wake of the Emerging Market and LTCM crises, just tell us much about the persistence of financial market phenomena such as asset price bubbles and the ways in which the central banking community has a tendency to fight ‘yesterday’s monetary wars’ rather than those of the future. A couple of things struck me.
One was the focus on price stability – in particular comments from Wim Duisenberg, then the first head of the European Central Bank, whose comments reflected the orthodoxy of central banks like the Bundesbank that price stability was the holy grail of central banking, something that itself had roots in prior decades of inflation.
Inflation, in consumer prices at least, is now picking up – and in my view represents a threat to bond market stability.
The second interesting factor in the 1999 meeting was a discussion on asset prices and monetary policy. There was a firm consensus then that central banks should not tackle asset price bubbles head on. The rest as the say is history – the 2001 dot.com bubble and then the housing and derivative bubbles of 2007 that led to the financial crisis. Today, there is not enough discussion amongst central bankers about the effect of monetary policy on wealth inequality or on the bubble in fixed income markets. If and when the trillions of bonds in and around negative yield territory sell-off, this will produce a crisis in central banking.
Indeed, if we move forward twenty years and think of what the 2021 Jackson Hole symposium will discuss, I can hazard at least three topics. The first will be an evaluation of central banking credibility following the ‘Great QE Bubble of 2021/22’. The second might be ‘Does Facial Recognition Improve the Efficiency of Central Bank Digital Currencies’ and a third might be ‘The Effects on the Emirate Economies of Euro-zone Membership’. Much to think about for the future.