Just this month at the Jackson Hole central bank annual meeting! Will the Federal Reserve undergo a major shift?
Just this month at the Jackson Hole central bank annual meeting! Will the Federal Reserve undergo a major shift?
If central banks want to approach and maintain the sacred 2% inflation target, the final step may be: they need to change their strategy.
Over the past two years, central banks have been repeating the slogan that relies on economic data, leading to interest rates staying at high levels for a long time. With market sentiment shifting towards rate cuts, this slogan faces the risk of becoming no longer applicable.
The market expects that the US and UK July CPI data to be released this week will both rise, which may confuse the carefully crafted policy message of central banks, that restrictive monetary policy is coming to an end.
The Federal Reserve is expected to follow the footsteps of the European Central Bank and the Bank of England next month, but the dilemma facing the Federal Reserve may be that the perception of easing policy when inflation is rising is not favorable.
One feasible solution is: reduce the central bank's reliance on monthly data and emphasize the difficulty of forecasting. This also helps reflect common sense. Since the outbreak of the COVID-19 pandemic, there have been huge economic fluctuations, making data unreliable and inferring economic outcomes more difficult. For example, the difficulties faced by the UK National Statistics Office in collecting labor force surveys are just the tip of the iceberg.
Policymakers know that maintaining monetary policy at such a restrictive level for over two years amplifies the risks to fragile economic prospects. If inflation data fluctuates unpredictably, and other signals (such as the unemployment rate or bank loans) flash warning signs, they need an exit strategy.
Coincidentally, the Deputy Governor of the Reserve Bank of Australia, Hauser, delivered a speech titled "Beware of False Prophets," warning people not to be overly confident in predictions. Hauser's analysis provides more evidence for a speech by the Chief Economist of the Bank of England, Piel, in July, where he stated, "We must be realistic about how much content any one or two releases can add to our assessment." Hauser spent most of his career at the Bank of England and has established a reputation for innovative thinking. He is likely expressing the views of many in the central banking community.
Perhaps not by chance, the theme of the annual Federal Reserve symposium in Jackson Hole, Wyoming next week is "Reassessing the Effectiveness and Transmission Mechanisms of Monetary Policy." This coincides with the subtle shift of the Federal Reserve's focus from primarily focusing on inflation to the unemployment aspect in its mandate.
Even Bank of England Governor Bailey did not attempt to signal the market in the August 1st monetary policy assessment. "I won't give any views on future interest rate trends—I will say that we will make decisions step by step at each meeting." Bailey described this as a new framework, "within this framework, our policy considerations are moving beyond the data."
This will be a significant shift for central banks, shifting the focus of the monetary policy committee from specific data releases to a new framework using "all available information." This essentially means that decision-makers will have greater freedom, not being constrained by fluctuating economic data releases, especially the previously sacred "three pillars," including services inflation, labor market tightness, and private sector wage growth Despite the service sector CPI data in June once again significantly exceeding expectations, the rate cut by the Bank of England remains significant. This indicates that the central bank wants the market to focus on their statements rather than forming opinions based on highly concentrated forecasts and outcomes. This also provides the central bank with flexibility to make policy changes, which can be seen as precautionary measures taken as the economy begins to falter.
What is refreshing is that central bank governors are shifting from focusing on lagging data to eliminating inflation in a flexible manner. Everyone can see the same statistical data, and the salaries paid to central bank governors are meant to solicit their professional insights and judgments