US Fed officials gather at Jackson Hole, markets look for rate hints

Markets will look to the US Fed meeting for hints on a rate rise, but this year Jackson Hole is about the bigger picture.

US Fed chair Janet Yellen with ECB president Mario Draghi at the 2014 Jackson Hole meeting. Picture: AP

For observers of America’s central bank, the lesson of 2016 would seem to be that Federal Reserve officials will always find a reason to do nothing.

After hawkish comments last week from influential Fed members Stanley Fischer and William Dudley, Fed officials head to their annual symposium in Jackson Hole, Wyoming, on Thursday. We now await the appearance of Janet Yellen, the chairwoman, to see whether she adds credence to what economists at the Royal Bank of Canada describe as the latest “Fed bluster”, which hints at action at last and an interest rate rise sooner rather than later.

For what it’s worth, markets have put the chances of an interest rate rise before the end of the year at just over 50 per cent, although few analysts expect Dr Yellen to present any more detailed clues over timing this week.

But this year’s Jackson Hole is really about the bigger picture. The official topic is “designing resilient monetary policy frameworks for the future” and John Williams, San Francisco’s Fed president, has already provided the launching point for discussion, going so far as to promote an increase in the Fed’s 2 per cent inflation target.

Mr Williams’s worries that the US economy is stuck in a low growth and low inflation rut even after years of super-easy monetary policy are widely shared. As the neutral rate of interest (the rate consistent with full employment, trend growth, and stable prices) has fallen, he notes that there is simply not enough room for central banks to cut interest rates in response to an economic downturn.

Of course, it’s not that simple and Mr Williams notes that a somewhat higher inflation rate comes with its own risks, most notably price instability, which could be a threat to the individuals and businesses that the policy aims to help.

But Mr Williams’s wider point is well made. There are limits to what monetary policy can and, indeed, should do. The burden must also fall on fiscal and other policies to do their part to help to promote economic stability.

His other suggestions, which disappointingly have not attracted as much attention, include tying tax rates or government spending to unemployment rates and instituting government spending programs that automatically kick in during economic downturns.

One potential avenue would be to increase longer-run growth and prosperity through greater long-term investments in education, public and private capital, and research and development. Despite scepticism and endless column inches questioning whether college is worth the cost, Mr Williams insists that the return on investment in post-secondary education is as high as ever. Likewise, returns on infrastructure and research and development investment are very high on average.

Coming in the midst of an election campaign that has focused on economic policy and on reforming the Fed, the timing of Mr Williams’s contribution is interesting. However, don’t expect changes soon. Fed officials are only just embarking on this discussion about changes that would be difficult to implement. Even Mr Williams suggests “you don’t change horses in the middle of a stream”.

There is also, as economists at Goldman Sachs have pointed out, a real likelihood that any sense of urgency that may once have spurred such ideas, will fade as the economy improves. This could mean that when the next downturn happens, in whatever form, there may well be no new tools to force inflation higher. However, the discussion on how to do things differently will be under way and we may have to satisfy ourselves with that as the main, inconsiderable achievement of this year’s Jackson Hole event.

The Times