Jackson Hole

Once a year, Central Bankers from around the world gather in Jackson Hole Wyoming for a monetary policy conference.

Its the whos who of Central Banking, but befitting their conservative image, the facility at Jackson Hole does not have any resort-like amenities such as a spa, exercise room or salon,” and “attendees are responsible for paying their own airfare, lodging and all expenses related to recreational activities.” Not exactly a boozy junket.

This year, attendees were saved the expense of “related recreational activities” because the entire conference was moved online (it was also live-streamed to the ‘public’ [about 2,000 monetary policy hacks from around the world] for the first time).

Eager to double down on the technological firsts, the Fed chose a font from Tron:

Image

Fed Chairman Powell’s speech announced the results of the Fed’s first ever review into monetary policy, underway at the Fed since 2018. I will write up a longer piece for this in a a bit, but a quick recap:

  • The Fed has committed to flexible average inflation targeting. The 2% inflation target is still the long term objective, but when inflation undershoots the target, the Fed will now allow a symmetrical overshooting. E.g. if inflation has been persistently in the 1-1.5% range, the Fed may allow inflation to rise to 2.5% in the following years.
  • The Fed is rethinking its approach to unemployment and will no longer tighten policy preemptively when unemployment approaches its ‘natural rate:’

our policy decision will be informed by our “assessments of the shortfalls of employment from its maximum level” rather than by “deviations from its maximum level” as in our previous statement.24 This change may appear subtle, but it reflects our view that a robust job market can be sustained without causing an outbreak of inflation.

Some initial thoughts:

  • Pushing on a string? The Fed is probably hoping that a shift in its inflation approach will drive up inflation expectations. It remains to be seen whether this will be any different to similar expectations oriented policy that has been tried since ~2012.
  • Bye bye 2%? While the 2% target is still there in the long term, the flexibility of the new average target means inflation could run above 2% for several years. After all, inflation has been below target for more than a decade. Will this break the inflation taboo and open the door to more public discussions about the right level of inflation and its tradeoffs?
  • The rules vs. discretion debate is over. The Fed will have discretion about what constitutes maximum employment and about how average inflation will be measured. The Taylor rule is long gone. This will make for better policy but will probably create tensions with political independence. Seeing the Taylor rule as an optimisation tool misses the point – it was an objective reference point to reinforce technocratic legitimacy. That is now gone.
  • Legitimacy Legitimacy Legitimacy. The Fed has to aggressively pursue transparency and accountability to maintain our democratic legitimacy.” Discretion creates political problems. The Fed is at great pains to emphasise its commitment to broad-based and inclusive employment. Powell talked about the benefits of a hot labour market for low and medium income groups several times. This pattern is also visible at others central banks like the Bank of England.
  • Future politics: Ambiguity about the exact level of inflation and unemployment + greater efforts towards democratic legitimacy = politicization of monetary policy. Its not hard to see a scenario with employment at 3.5%, inflation nudging 2.5% and the Fed caught between a vocal financial sector demanding hawkish policy and a buoyant labour market, newly recognised by the Fed, demanding dovish policy.

Powell’s speech for those interested.

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