As a part of covid stimulus plan, to facilitate the economic recovery, the Fed has been purchasing assets of $120bln every month comprising $80 bln in treasury securities and $40 bln in mortgage backed securities.
The dollars flowing from this asset purchase programme (APP) are one of the major reasons for the high level of inflation hovering at about 5% for over 18 months.
The high level of inflation made the Fed continue the zero interest rate regime. The US interest rates and Fed measures globally impact the investments from US in other economies and the capital flight. Therefore, the 2021 year’s Jackson Hole Economic Symposium attracted more and closer attention of the world economies.
As Jackson Hole symposium commands global attention, it is imminent to summarize the proceedings of the recent symposium at least with regard to the key economic policy measures and their interface with other aspects. Accordingly, a disintegrated yet summarized analysis of the symposium is made to facilitate a consolidated understanding.
The Jackson Hole Economic Symposium (JHES) is an annual symposium that allows an open discussion of economic issues, stock and currency issues facing the economies of the world.
JHES takes place in Jackson which is a town in the US state of Wyoming. Jackson Hole was originally named after Davey Jackson, a mountain man who was trapped in the area during the late 1800s. “Hole” was a term used to describe a high mountain valley back in the day.
The event sees participation from more than 70 countries of 120 experts including bankers, academics, finance ministers, etc. The symposium was started in year 1978 by the Federal Reserve Bank of Kansas City, and Jackson Hole, Wyoming, has been the convergence for the symposium since year 1981.
For the year 2021, the symposium theme is “Macroeconomic Policy in an Uneven Economy,” and was held virtually on Friday, August 27, 2021. The discussion focussed on the macroeconomic policies and their impact on the other key variables including interest rates, inflation, and economic growth.
Select points of the symposium are as follows:
- Inflation can help to get relative prices right
- Changing weights in inflation measure (getting “core inflation” right) not enough
- Reallocation is inefficiently low
- Expansionary policy can help reallocation
- Expansionary policy discourages mobility by lowering unemployment in contracting sectors
- But it encourages mobility by getting relative wages right
- QE was effective in reducing government bond yields during the initial period of scarce liquidity. Unclear effects on term premium, output and inflation in subsequent months
- Central bank independence may be vulnerable when central bank balance sheets are heavily exposed to interest rate risk, credit risk, exchange rate risk.
- Asset purchases (and sales) must be clearly communicated as serving central banks’ price and financial stability objectives to allay concerns about fiscal dominance. APPs must be done at market prices (favoring secondary market transactions)
Jerome Hayden Powell, the Federal Reserve Board’s Chairman stated that inflation is a cause of concern but it is only temporary and transitory. He defended his stance in the following five points:
- Inflation is mostly occurring in a “narrow group of goods and services that have been directly affected by the pandemic and the reopening of the economy.”
- Among some products that have seen a high run up in prices, inflation seems to be moderating.
- There have been no crazy wage gains.
- Longer-term inflation expectations are relatively normal.
- Long-term trends still apply.
On the premise of the above findings, Powell declared that the Fed will taper the APP but will not target to increase the interest rates. This assurance of Powell is highly appreciated. However, the economies could not ignore the guidance on the tapering since the tapering could have significant impact on the global economies. It is not known whether Powell will remain in the Fed Chair to address the symposium next year. But, for now, the concerns on rise of US interest rates remain.
*Dr.Kishore is an Economist and a Corporate Finance Professional. He is the CFO of Meenakshi Group headquartered at Hyderabad. The views are his personal but do not reflect those of his organization or of this publishing house.
Disclaimer: The summary is in a disintegrated manner and no originality of theme is claimed as the discussion is limited to the stylized facts.