In my latest piece for the AIIA I talk about some of the longer run political trends behind the recent announcements from the Fed at Jackson Hole. For a quick and dirty summary of the Jackson Hole conference, check this out.
A few excerpts:
So, what will change? Right now, not a lot. The Fed is signalling that policy will remain accommodative for a long time to come, and markets have continued their bull run. COVID-19 has depressed both inflation and employment, so it will be many years before the Fed’s new lenient attitude to inflation is tested.
But discretion-based policy making is risky business for a politically independent institution. “We have your best interests at heart” is cold comfort to those on the wrong end of an interest rate hike. The kinds of creative policy that discretion allows, like bank bailouts and negative interest rates, generates controversy. Discretion is doubly risky in a political climate where Trump has normalised once inconceivable attacks on the Fed.
Greater transparency and public engagement help offset the immediate political risks associated with discretion, but they open monetary policy to future debates that Central Bankers might find uncomfortable. In admitting the policy errors of the prior framework (like the 2018 rate hikes), the Fed opens the door to future questioning. With no rules, the Fed’s judgement is up for criticism, even as greater public engagement introduces new, sometimes angry voices to the conversation.
(If you can’t get enough about macro, you might also enjoy this piece I wrote about why we need new macroeconomic folk tales.)