Central Bankers Gear Up For More QE

Jeremy Warner Daily Telegraph August 31, 2010

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By Jeremy Warner, Assistant Editor Published: 7:33PM BST 30 Aug 2010

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My guess is that the hawks will eventually be vanquished and that we will see more QE

Some of them will have spent the weekend at Jackson Hole in the US Rockies, where every August, the Federal Reserve Bank of Kansas City holds a retreat for the leading lights of monetary officialdom and academia.

The timing of the event, at the tail end of the summer holidays, always gives it a significance it perhaps doesn't deserve, but this year, with renewed weakness in the most recent US data, it has been more closely watched than ever.

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As Ben Bernanke, chairman of the US Federal Reserve, observed, in the year since the last Jackson Hole symposium, the deep economic contraction has ended, but growth has been slow to take hold and joblessness remains high.

Two questions were uppermost for central bankers and other attendees; is the recovery yet secure, and if not, might it be made more so by another bout of quantitative easing? What have we learnt from the weekend of speeches and seminars?

Depressingly little, I'm afraid to say. Policymakers could agree the blindingly obvious, that the recovery remained fragile, but not what ought to be done about it, or even whether accommodative monetary policy is any longer working as it is supposed to.

From Charles Bean, deputy governor of the Bank of England, we had a characteristically thoughtful but somewhat irrelevant retrospective on the lessons for monetary policy of the economic meltdown, which predictably concludes that relatively low policy rates played only "a modest direct role" in causing the crisis.

Central bankers seem to believe that if they repeat these "don't blame us for the credit crunch" assertions often enough, they will eventually assume the authority of biblical wisdom. Believe them if you will.

Otherwise, Jackson Hole seemed to offer nothing in the way of comfort; the overall impression was instead one of confusion, differences over what to do next, and lack of resolve o

By Jeremy Warner, Assistant Editor Published: 7:33PM BST 30 Aug 2010

Comments

Otherwise, Jackson Hole seemed to offer nothing in the way of comfort; the overall impression was instead one of confusion, differences over what to do next, and lack of resolve on how to prevent the crisis assuming a second leg.

Jean-Claude Trichet, president of the European Central Bank, stuck to wearingly familiar rhetoric. Deficit reduction is the key economic challenge facing advanced economies, he insisted, and delaying the necessary cuts in public debts would be "very dangerous".

Ben Bernanke seems as paralysed by the divisions on the Fed's Open Markets Committee (FOMC) as Mr Trichet is compromised by the imaginings of his German puppet masters. It seems clear enough that Mr Bernanke would do more to support the US economy given the chance, but he's not allowed to say so because that's not the Committee's collective view. Hawks had to be dragged kicking and screaming into agreeing even the limited concessions announced earlier this month.

Mr Bernanke was able to persuade them by ingeniously arguing that allowing the Fed's balance sheet to shrink when the economy was weakening would perversely increase the passive policy tightening of asset maturity by inducing an even more rapid runoff of mortgage securities from the Fed's balance sheet.

Mr Bernanke insists that the Fed has the tools to prevent deflation, and will use them if it sees a significant risk, but you got the sense that even this relatively meaningless backstop position will be too much for the Fed's hardliners. Mr Bean might not think loose monetary policy had much to do with the last crisis, but several FOMC members most certainly believe the present bout of it risks sowing the seeds for the next one. Still others think that whatever the Fed now does, policy has reached the limits of its effectiveness.

As it happens, things are looking rather better over here in Europe right now than they are over there in the US. Growth is coming in higher than expected, unemployment in the main economies has remained much lower than anticipated, almost unbelievably so, and surveys suggest rising business and consumer confidence.

Yet as in the US, there is collective acceptance that it cannot last, that once the fiscal consolidation begins and the inventory cycle runs its course, the recovery will struggle.

Alarming but worryingly plausible is a warning from Alistair Cox, chief executive of Hays, the UK's biggest recruitment agency, that the UK private sector is incapable of creating anywhere near enough new jobs to absorb the 600,000 plus public sector workers expected to be laid off over the next five years.

Throughout the advanced economies, both business and households are still stuck in the mindset of "balance sheet repair", or paying down debt rather than spending and investing. This is interfering with the critical handoff that must occur to underpin a durable recovery – namely a return to self sustaining growth in private demand. That point has not yet unambiguously been reached, either in the US or Europe, and to judge by another paper presented at Jackson Hole, it may be some time yet before it is.

Professor Carmen Reinhart of the University of Maryland says that the US economy may experience slow growth and stubbornly high unemployment for a decade or more as a result of the debt overhang exposed by the financial crisis.

No wonder central bankers are at a loss over what to do next. My guess is that the hawks will eventually be vanquished and that we will see more QE, both in the US and Britain, before we are done.

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