The politics of Jackson Hole

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.)

They don’t talk like they used to

From Walter Bagehot’s ‘Lombard Street‘ (1873), quoting then Governor of the Bank of England on its conduct in the Panic of 1866:

This house exerted itself to the utmost – and exerted itself most successfully – to meet the crisis. We did not flinch from our post. When the storm came upon us, on the morning on which it became known that the house of Overend and Co. had failed, we were in as sound and healthy a position as any banking establishment could hold, and on that day and throughout the succeeding week we made advances which would hardly be credited

Compare this to Andrew Bailey’s recent speech at Jackson Hole:

In June we increased the stock of QE purchases, but at a slower pace. And in August we introduced forward guidance, stating that the Committee does not intend to tighten monetary policy until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably… We also made clear that our box does include other tools, including the possibility of negative rates. We have used private sector asset purchases through the corporate bond programme, longer-term liquidity provision to banks with targeted lending incentives, and direct purchasing of newly issued commercial paper to supplement market-based lending channels. We are not out of firepower by any means, and to be honest it looks from today’s vantage point that we were too cautious about our remaining firepower pre-Covid.