At Fed’s Jackson Hole Retreat, Central Bankers Eye New Economic Risks
Central bankers around the world have finally reached the point, after many years, when a period of strong economic growth allows them to unwind their postcrisis easy money policies.
But at the Federal Reserve’s annual retreat here over the weekend, they found themselves eyeing new risks, including widening trade disputes and political challenges to their independence.
“It’s paradoxical that the United States is starting to put obstacles in the road at a time when its economy is firing on all cylinders,” said Agustín Carstens, general manager of the Bank for International Settlements, which serves as a central bank for the world’s central banks.
Trump administration officials, who didn’t attend the conference, have said they see tariffs as a way to boost U.S. industries by forcing other economies to lower their own trade barriers, buy more American exports or reduce foreign competition.
Trade negotiations last week between the U.S. and China failed to produce any visible signs of progress, raising the odds Washington will impose tariffs on $200 billion worth of Chinese goods. So far, the U.S. has put tariffs on $50 billion in goods, and China has reciprocated.
The U.S. and Mexico on Saturday were getting close to reaching a bilateral agreement on key issues holding back a renegotiation of the North American Free Trade Agreement, according to people closely tracking the negotiations.
Economists generally say low barriers to trade and investment reduce consumer prices and allow capital to flow to the most productive companies and industries, fueling rising prosperity.
Mr. Carstens highlighted the risk of a chain reaction of unintended financial consequences of trade barriers. Tariffs could strengthen the dollar in two ways: either by spurring inflation and thus tighter U.S. monetary policy, or by weakening local currencies in countries whose exports are targeted. To defend against capital flight as the dollar strengthens, emerging market economies must also raise interest rates, curbing their own growth.
“This would hit U.S. exporters with a double whammy, and emerging market economies with a triple whammy,” said Mr. Carstens, the former head of Mexico’s central bank.
One question is how the Fed or other central banks might respond to escalating trade tensions. Central banks typically raise interest rates to restrain price pressures or cut rates to boost economic activity. Confronting both rising inflation and slowing growth “is of course the most awkward situation for a central bank,” said Mr. Poloz.
He discouraged market assumptions that central bankers would ride to the rescue by keeping rates lower if trade disputes accelerate. “This is going to hurt something, so you think monetary policy will fix it,” Mr. Poloz said. “That wouldn’t be our job, to clean that up. It just wouldn’t [work].”
Smaller nations with open economies could be most exposed to any fallout from slower global growth. “There are some measures now which make even me worried, and which I don’t applaud,” said Øystein Olsen, Norway’s central bank governor. He said he was confident “strong institutions and also the general common sense in the American people over time will not lead to a major setback.”
Fed officials haven’t said how they would respond to trade-related shocks, though minutes of their most recent policy meeting showed all of them saw it as a risk to growth.
“There is a strategy here that is being pursued that says…that short-term pain can lead to significant long-term gain, and we’ll just have to see whether that’s how it plays out.” said Atlanta Fed President Raphael Bostic in an interview, referring to the Trump administration’s approach.
Other policy makers at the conference expressed worry about the future of central banking generally at a time when structural changes in the economy have left some workers less satisfied with the quality of jobs. Meanwhile, several central banks are raising interest rates and withdrawing other stimulus measures—unpopular steps that they see as necessary to keep their economies on an even keel.
Central bankers needed to do a better job reminding the public about policy successes, said some attendees. Officials have taken for granted, said Mr. Carstens, that the public understands the benefits of low and stable inflation achieved over the past three decades.
Mr. Carstens said it was “very telling” that the leaders of Argentina and Turkey, two countries that have faced severe financial instability in recent months, hadn’t allowed their central banks to act independently of political pressure. “It was not the single problem, but it was one of the major catalysts,” he said.
On Friday, Fed Chairman Jerome Powell defended the U.S. central bank’s gradual rate increases against criticisms that it is moving either too quickly or too slowly, jeopardizing the economy’s expansion.
Mr. Trump told donors recently he was annoyed that Mr. Powell was raising rates. Such criticism marked the end of a 25-year period in which U.S. presidents refrained from publicly commenting on monetary policy.
“Central banking is difficult in the first place,” said Raghuram Rajan, former chief of India’s central bank. To do it when “both the public and the politicians have lost trust, and more important, politicians are not averse now to throwing brickbats at the central bank…that’s a difficult environment.”
Nick Timiraos & Paul Kiernan