Keith Savard
Adjunct Fellow
Banking and Capital Flows and Capital Markets and Finance and Global Economy and Public Policy and Systemic Risk
Keith Savard is a fellow at the Milken Institute. He has extensive executive management experience with expertise in evaluating the interrelationship between economic fundamentals and activity in global financial and commodity markets. He also has a background in sovereign risk analysis and applying a disciplined economic approach to investment-portfolio decision-making.
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Central Bankers: Trying to Dig Themselves Out of a (Jackson) Hole?

By: Keith Savard
August 26, 2016

Many prominent central bankers are gathering in Jackson Hole, Wyoming this week as they try to dig themselves out of a policy hole. Central bankers have become increasingly concerned that their game plan for restoring sustainable robust growth to the global economy is not working. Although unconventional monetary measures, like quantitative easing (QE), were instrumental in preventing the Great Recession from becoming another Great Depression, success in returning the global economy to pre-crisis growth rates with targeted inflation and full employment (the United States being the exception in this category) has remained elusive.

The idea that aggressively low interest rates and central bank bond purchases would spur real investment and jump start economies has so far not panned out. Indeed, the lack of investment is viewed by many economists as one of the prime reasons for the lack of productivity throughout the world. This is seen as particularly troubling when trying to close output gaps and reduce deflationary pressures.

In the meantime, Federal Reserve economists and others remain puzzled as to why the return of near full employment in the United States has not contributed to more noticeable wage pressure. It was hoped that a rise in wages would boost consumption and raise inflation expectations enough to see the Fed’s two-percent inflation target reached once again, after a long hiatus. At this point, the search for the elusive Phillips curve (a supposed inverse relationship between the level of unemployment and the rate of inflation) continues.  

The issue of the natural rate of interest also appears to be deepening the hole in which central bankers find themselves. The natural rate of interest—which represents the rate that neither overheats nor slows the economy—is viewed a proxy for the maximum potential federal funds rate. According to many economists, the natural rate of interest has declined significantly during the past quarter century to a historic low level. Some believe a further decline is possible.

In this situation, monetary policy is seen as being ineffective in boosting economic growth while keeping inflation low. As a result, governments must provide increased fiscal stimulus and central banks concurrently must abandon the practice of targeting low inflation. Taking this approach, however, would be a de facto admission that the past seven years of monetary policy has more or less failed to stimulate adequately the global economy.   

With central bankers generally not inclined to make such an admission, they nonetheless have descended on Jackson Hole to attend the Kansas City Fed’s economic symposium entitled, “Designing Resilient Monetary Policy Frameworks for the Future.” There is little doubt that the economists in attendance will contemplate possible further use of negative nominal interest rates or even propose the adoption of so-called helicopter money[i] as a bridge to resilient monetary policy frameworks.

Whatever officials of the Federal Reserve and other central banks decide to do, they do not want to find themselves in the position of an existential threat to their relevance, as suggested by Greg Ip of the Wall Street Journal.  Moreover, with the credibility of central banks being increasingly called into question by market participants, they could face unwanted scrutiny from politicians, particularly if a recession were to suddenly appear.  

[i] Helicopter money is a hypothetical, unconventional tool of monetary policy—first proposed by the famous economist Milton Friedman and elaborated on by former Federal Reserve Chairman Ben Bernanke—that involves printing large sums of money and distributing it to the public in order to stimulate the economy. Helicopter money is largely a metaphor for unconventional measures to jumpstart the economy during deflationary periods.