Economic Commentaries

Entries for October 2016

13

Speakers at the Federal Reserve's annual Jackson Hole Wyo. conference seemed to talk past each other. One group expressed concern that the U.S. and global economy is in the late stage of economic expansion and inflation and growth are still intolerably low and slow. Indeed, soundings from the BOJ and ECB were in the direction of more accommodation. Others focused on unconventional policies in the U.S. in the event of a downturn, including negative interest rates; a boost to the 2% inflation target; a permanent increase in the balance sheet; targeting nominal GDP.

Of these we think negative interest rates and a boost to the inflation target are the least attractive. Targeting nominal GDP is worth consideration. But ideally this should require joint monetary and fiscal action. Unfortunately this is very likely beyond the ability of policymakers to implement in a vacuum, but fiscal expansion with central bank debt monetization is within the scope of policy coordination.

Meanwhile, in her keynote address Fed Chair Yellen rejected these extraordinary actions, suggesting that the Fed still has sufficient conventional tools to combat recession. Indeed she suggested that even these may not be needed anytime soon because the domestic business outlook is improving. In this vein the Fed Chair suggested that steps toward interest rate monetization could be taken in coming months.

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