Don’t miss out on the latest updates from Central banks. Sign up now to receive our myFT Daily Digest email, summarizing the most recent news every morning.
We’ll keep you informed about the latest developments in Central banks through our daily email digest.
This year’s annual Jackson Hole conference provided an opportunity for central bankers to reflect on recent developments and discuss the evolving global economic landscape. While inflation remains “too high,” as stated by US Federal Reserve Chair Jay Powell, higher interest rates have started to have an impact on demand and price growth. Consequently, the focus shifted towards topics such as the climate transition and geopolitical tensions, highlighting the increasing complexity of central banking.
When setting interest rates to achieve their inflation targets, monetary policymakers must assess the balance between demand and supply. If demand is higher than supply, raising interest rates helps to cool down an overheating economy, and vice versa. However, economic uncertainties make this calibration significantly more challenging.
The past three years have brought significant changes to the global economy, with the pandemic leaving lasting scars, geopolitical disruptions rewiring supply chains, and the climate transition driving shifts in energy markets. Additionally, factors such as aging demographics, the rise of AI, and increased government spending further complicate the supply-demand equation. Powell describes the current situation of rate-setting as “navigating by the stars under cloudy skies.”
Furthermore, central bankers face the challenge of using interest rates, which have long and variable lags in impacting demand, as a tool during times of rapid change. To address these challenges, ECB President Christine Lagarde emphasizes the need for central banks to adapt and develop new strategies. Failure to do so may harm their credibility in fighting inflation.
Central bankers must recognize the limitations of economic models in unprecedented circumstances and focus on understanding supply dynamics. While assessing demand-related factors may be easier, understanding long-term shifts in trade, energy, and the workforce requires broader expertise and data sets. Additionally, central bankers should consider whether the 2% inflation target remains relevant in the long run.
This year’s Jackson Hole conference highlights the limitations of current monetary policy tools. Deeper analysis of how these tools operate is necessary, and without structural reforms to support supply, volatile prices may become the norm. Therefore, governments also need to play a role in addressing these challenges.
Denial of responsibility! VigourTimes is an automatic aggregator of Global media. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, and all materials to their authors. For any complaint, please reach us at – [email protected]. We will take necessary action within 24 hours.
