The paralysis in policy decisions

The very name of the venue evokes a feeling of not only ordinariness but also of a non-event. Jackson Hole, Wyoming, the town with 15000 population, that has been hosting summit of the world's most powerful central bankers since 1978 under the aegis of Kansas City Federal Reserve Bank (FED) lacks the glitz and glamour of the World Economic Forum (WEF) at Davos or the grandiose statements coming out of the annual meeting of the International Monetary Fund (IMF) in Washington, D.C. but the potential, even the possibility of groundbreaking policy announcements being aired at the summit of the global 'systemic' bankers is always present.

This year's annual summit that has just concluded, taking place in the backdrop of a fragile growth in global economy, was expected to make important announcements about a balance between tightening of monetary policy through rise in basic interest rates and putting on hold monetary easing, surprisingly sounded subdued, even was conspicuous by their absence. In fact, there was no direct reference to these two important issues that have been at the core of the monetary policy of central banks in America, Europe and Japan since they were seen as the knights in shining armour after the financial meltdown in 2007-2008. Many were hoping that this year's Jackson Hole summit (it is also a symposium with economists as participants) would provide insights on important policy issues facing the major central banks. However, both the star participants - Janet Yellen, chair of FED (Federal Reserve System, USA) and Mario Draghi, president of the European Central Bank (ECB) - avoided these issues. Instead, they shifted the onus of responsibility on politicians, exhorting them to be tough on financial regulation and be less bellicose about adopting protectionist measures against free trade. In other words, they implied that what ailed the global economy was not lack of monetary policy but public policy on fiscal administration and free trade. Granted, the two bugbears of international economic landscape have not yet assumed crisis proportion, but the noises coming out of corridor of power, particularly in the US, is anything but reassuring about prioritising policy options prudently.

This year's theme of the central bankers' summit was 'Fostering a Dynamic Global Economy'. Its very broad scope hinted that the central bankers were looking beyond monetary policy to carry on the momentum for sustained growth, not to speak of incremental rise in it. This, obviously, was based on their realisation of the limits to the power of central banks to keep up the dynamism in the recovery of growth on a continuing basis. Particularly, the two main central banks, the Fed and ECB, are now beleaguered by uncertainties created by the volatile equity markets and sluggish fiscal stimulus. Both face awkward and delicate policy trade-offs between growth and financial stability. Predictably, both Janet Yellen and Mario Draghi, were looking for policy options and to their credit they succeeded in this respect. Of course, the reasons for their expectations were different. Be that as it may, market will now have to wait for clarity on policy issues that have a crucial impact on asset prices.

Many had hoped that Janet Yellen would be more specific on how Fed intended to address competing claims on monetary policy from frustratingly low inflation and very high assets prices, redolent of the days when her celebrated predecessor Alan Greenspan's colourful descriptions of 'illogical exuberance'. As for ECB, it was expected that Mario Draghi would announce about the approach to gradually reducing its large-scale purchase of securities in pursuit of monetary easing. Policy statements from him were also expected to calibrating and sequencing the tapering of monetary easing with steps to restore policy interest rates to positive levels in the midst of the stronger Euro. His failure to do so further strengthened the Euro against US dollar with the prospect of increasing US trade deficit against the Euro zone countries.

Bank of Japan (BOJ), together with Fed and ECB, is regarded as one of the systemically important bank. With the presence of Huruhiko Kurida, the governor of BOJ, also at the Jackson Hole gathering, it was widely expected that there would be signals on whether more than one systemically important central banks would simultaneously normalise monetary policy as a matter of course. The Jackson Hole summit of central bankers belied all these expectations, not to speak of hopes. Rather than comment on monetary policy, the Fed chairman opted for defence of the financial regulation in recent years, cautioning about the risks of sudden and excessive de-regulation, a not so subtle swipe at Trumponomics. Mario Draghi, however, tactfully steered clear of immediate policy issues, even though the recent pressure of strengthening power of Euro stared him in the face. Veering away from monetary policy he, too, turned to free trade defending it and stressing the importance of making it more strongly entrenched in the global economic architecture. In doing this, he reinforced Janet Yellen's stance on prudential financial regulation and integration of the global economy through trade.

No one can, however, critique Fed of being complacent and maintaining status quo. It has already winded down quantitative easing (QE) and raised rates three times, albeit by fractions of a decimal. It has also signalled its intention to raise rates by the same degree for the fourth time when the situation appears right. Some have turned this policy as 'beautiful normalisation', a rather romantic expression in the hard-nosed world of high finance,

But when it comes to globally concentrated action, neither Ms. Yellen nor Mr. Draghi or Mr. Kuroda is yet in a position to announce with authority on the prospects of simultaneous normalisation. The policy transition away from excessive reliance on central banks for fostering growth seems to be still away. The paralysis in policy decisions on the part of central bankers and governments, exposes the fragility of the global economy's recovery. It may not matter in the short run, because central banks can continue to be generous in easing monetary policy for some more time. But the longer it takes to reverse the existing policy, the more it increases the risk of damage to the economy from rising asset prices sustained by easy money. The underlying message is, delay in political decision to promote pro-growth measures through fiscal policy can usher in another financial meltdown.

Before the Jackson Hole summit opened there was excitement about possible fireworks from statements by the systemically important central bankers. In the event, the speeches made were an anti-climax. But keeping up with the spirit of the Wild West there was an undeclared showdown between central bankers and politicians. The summit succeeded in showing where the buck stopped when it came to managing the international economic order. 

[email protected]