Central bankers’ annual gathering at the Rocky Mountain resort of Jackson Hole in late August has often served as a crisis-fighting forum - from the currency meltdowns of the 1990s to the Great Recession a decade ago.
Last year there was angst over the escalating US-China trade war and uncertainty over Brexit, and Donald Trump lashed out at Federal Reserve chairman Jay Powell over interest rate policy.
But the macroeconomic challenge this year is of a vastly different order, with the IMF forecasting a 4.9 per cent contraction in global output due to coronavirus, the worst performance since well before the symposium was first held in Wyoming in the early 1980s.
Constraints
For the past decade policymakers have periodically fretted about a lack of ammunition in a world of low productivity and interest rates and already-bloated central bank balance sheets. All those constraints are being urgently revisited in light of the pandemic as the governments of advanced nations show differing degrees of willingness to aid monetary policy by hiking spending.
For the first time the gathering will be held in a completely virtual format, with none of the backroom banter or views of the Tetons that have come to define Jackson Hole.
Having rushed to engineer a massive policy response to the initial virus shock which briefly threatened to unleash a financial crisis, the world’s leading central banks face the next economic phase of the pandemic with a dwindling arsenal of monetary weapons and rising frustration that some key drivers of the recovery - both health and fiscal - are beyond their control.
“The initial and most damaging wave of the economic hit may be past us, but further waves may come and regardless, the economic scarring will be long-lasting. Yet policy space may be narrowing,” said Mark Sobel, a former US Treasury official and chairman of Omfif, a central banking think-tank.
“The Fed and the European Central Bank have used up a lot of ammo. Even when advanced economies are significantly recovering, there will still be a legacy of sky-high unemployment, large output gaps and enormous dislocations to deal with,” he added.
Tools
Even as central banks assess their tools to fight the next stage of Covid, they are also facing growing questions about the impact of their first round of support - in particular, whether it has inflated the values of risky assets, tech stocks and housing.
“There is a legitimate worry at this point that we are doing a bit of levitation,” said Robin Brooks, chief economist at the Institute of International Finance in Washington. “The massive increase in leverage and the low rates forever?.?.?. all of these things are worrying from a financial stability point of view.”
Most central bankers still hold the view that tackling the disinflationary shock and avoiding new financial market distress is their main priority - and that is expected to shine through at Jackson Hole.
“It will be different, and of course the informal getting together at break will be unavailable,” said Thomas Hoenig, former president of the Kansas City Fed which hosted past gatherings. “[But] the issues are very, very clear.”
Mr Powell’s speech on Thursday will focus on the Fed’s monetary policy framework review - a two-year effort to update its strategy for an era of persistently low interest rates and low inflation.
The conclusions of the review are still under wraps but it is widely expected to cement a more permissive approach to inflation and a more aggressive focus on reaching full employment.
But some economists say this simply emphasises how close the Fed is to the limits of its capacity for action.
Policy
“The Fed is running up against the long-term issue that when things are bad they are pushing on a string with monetary policy,” said Adam Posen, president of the Peterson Institute for International Economics in Washington.
“You can alleviate liquidity problems, you can put a floor under some asset prices, you can stabilise credit markets, all of which is constructive but none of which is sufficient to create recovery,” Mr Posen added.
According to Stephen Stanley, chief economist at Amherst Pierpont, Mr Powell risks disappointing investors if the Fed is seen as inconclusive on the details and schedule of its next steps. Markets are “jumping the gun” and “overeager on the timing” when it comes to the policy review, Mr Stanley said.
Meanwhile the fiscal picture has deteriorated after Congress and the White House failed to agree on a deal for additional federal spending which senior Fed officials had sought to encourage.
“The Fed is now having to shoulder more of the burdens of economic management, given the impasse in Washington,” said Larry Hatheway, co-founder of Jackson Hole Economics, a private research firm. “Central bankers would rather not feel that they too are beholden to fiscal policy and increasingly they are.”
Rates
On Friday, Bank of England governor Andrew Bailey will report on the BoE's own review of its monetary framework.
Mr Bailey is expected to augment this with a discussion of negative interest rates, which has come onto the BoE’s agenda since he became governor earlier this year.
Jagjit Chadha, director of the National Institute of Economic and Social Research in London, said: “We need to hear exactly how the Monetary Policy Committee thinks about communicating the likely path of interest rates, the end point and uncertainty.”
Christine Lagarde, president of the European Central Bank, is not speaking at this year's symposium and the ECB will be represented by Philip Lane, the chief economist, who will set out the eurozone perspective on a panel on Thursday. The ECB is also conducting a review of its policy, although its conclusion has been pushed back to next year because of the pandemic. – Copyright The Financial Times Limited 2020
