Forward guidance
A short, spicy and refreshing post by John Taylor, the famous economist of the well-known Taylor rule, about monetary policies and the Jackson Hole conference.
Please consider ‘A Less Weird Time at Jackson Hole?’.
Taylor ironizes about the rock star status of today’s central bankers and the importance of communication in their strategic framework.
Which strategy by the way? (emphasis ours)
“Paul Volcker chaired the Fed in 1982. He went to Jackson Hole, but he was not on the program to give the opening address, and no one was speculating on what he might say. No other Fed governors were there, nor governors of any other central bank. In contrast, this year many central bankers will be there, including from emerging markets. Only four reporters came in 1982 — William Eaton (LA Times), Jonathan Fuerbringer (New York Times), Ken Bacon (Wall Street Journal) and John Berry (Washington Post). This year there will be scores. And there were no television people to interview central bankers in 1982 (with the awesome Grand Teton as backdrop).It was clear to everyone in 1982 that Volcker had a policy strategy in place, so he didn’t need to use Jackson Hole to announce new interventions or tools. The strategy was to focus on price stability and thereby get inflation down, which would then restore economic growth and reduce unemployment. Some at the meeting, such as Nobel Laureate James Tobin, didn’t like Volcker’s strategy, but others did” |
Another governance failure
Could it be that the ‘forward guidance bubble’ of unconventional monetary policies, which relies on communication, is about to burst ?
Taylor seems to have a clear take:
“I hope there is also a discussion of less weird policy, and in particular about the normalization of policy and the benefits of normalization. In fact, with so many central bankers from around the world at Jackson Hole, it will be an opportunity to discuss the global benefits of recent proposals to return to a rulesbased international monetary system along the lines that Paul Volcker has argued for.” |
And its ‘unintended’ consequences
The ‘benefits of normalization’ … We couldn’t agree more.
Our propositions:
– Normalization is already taking place
– Its benefits are difficult to accept as they imply some sort of recognition of policy mistakes
– Forward guidance has played a central role in unconventional monetary policies …
– … as a cheap and powerful way to ‘remote control’ financial markets.
– Jackson Hole could either be seen as another ‘forward guidance’ communication event
– or an opportunity to reconsider the legitimacy and the global benefits of the current monetary experience.
Taylor is right: this Jackson Hole could be a great governance exercise.
Unless the rock star music goes on …
Jacques
Hello Jacques,
A big applause to you for your blog and the setup of your investment advisory and research company!
This is a great achievement and I look forward to your comments and to finding out where you stand with respect to the latest economic and financial developments.
You are perfectly right when you allude to the fact that the current Great unorthodox monetary policy does not fit well into any standard governance framework as evidenced by the substantial deviations from rules-based monetary policies in many countries… including Switzerland.
Have policy makers fully recognized the shortcoming of the current monetary policies ? Yes and No.
I think they have acknowledged that currency wars and competitive devaluations do more harm than good at a global level. That said, I also believe that they fail to see that their remedies are contributing to disappointing economic growth (See https://www.federalreserve.gov/newsevents/speech/yellen20161014a.htm).
In her comments addressed to policymakers and academics on October 17th, Janet Yellen suggests that “changes in aggregate demand may have an appreciable, persistent effect on aggregate supply–that is, on potential output.” She carries on by stating that “Several recent studies present cross-country evidence indicating that severe and persistent recessions have historically had these sorts of long-term effects, even for downturns that appear to have resulted largely or entirely from a shock to aggregate demand.”
The question raised by J. Yellen is whether that damage can be undone … “by temporarily running a ‘high-pressure economy,’ with robust aggregate demand and a tight labor market.”
More of the same… This suggests to me that the Fed would not react too restrictively if inflation was to surprise on the upside… fostering a steepening of the yield curve …
Take care,
Sébastien
Hello Sébastien,
Thank you for your insightful comment and kind words of support.
This blog is precisely about sharing investment views and opinions. See here for more information about this blog.
Undoubtedly, monetary policy deserves a special attention in the current macroeconomic and financial environment.
Back to the post. Even more than central bankers actually, I believe that the real ‘rock star’ of Jackson Hole has been monetary policy itself: great music to the ears of financial markets (forward guidance), that feeling of joy (unconceivable ‘risk-free’ returns) and of course a touch of hysteria …
More seriously: how did we get there?
This post is about foreseeable public governance failures and – I believe – the necessity to reconsider some important pieces along the process of public policies.
Please find some additional discussion material in ‘Autorités publiques: chronique d’un échec annoncé – le retour de la BRI’, a previous post that followed similar lines:
As a conclusion we suggest the following propositions:
– The risks associated to excessive unconventional monetary policies have been identified for long, for instance by the BIS;
– By using their main check and balance tool, the famous cost and benefit ratio, as an additional forward guidance instrument, central banks are playing ‘double or quit’. Expect them to quit;
– Unconventional policies have been facilitated by simple governance issues…
– … which are yet universally recognized by corporations, States, international organizations, … What about central banks?
– As the above research papers indicate, the efficacy of monetary policies is now conflicting with financial stability;
– The systemic nature of such risks, as a well as an urgent need of a better international coordination, will put the BIS forum to the forefront;
– Expect this to continue. The BIS warnings, while accurate, have been globally neglected;
– Governance failures should speed up the process of systemic convergence.
Thank you for sharing, looking forward to reading you on the blog.
Jacques