YELLEN AND DRAGHI HAD GOOD REASON FOR JACKSON HOLE RETICENCE / THE FINANCIAL TIMES COMMENT & ANALYSIS

Yellen and Draghi had good reason for Jackson Hole reticence

Regulation and free trade, not monetary policy, dominated central bankers’ speeches

by: Mohamed El-Erian


World view: Mario Draghi, ECB president, with Janet Yellen, Federal Reserve chair, and Haruhiko Kuroda, governor of the Bank of Japan, at the Jackson Hole symposium © Bloomberg


Primarily an academic-oriented event since its inception in 1978, the annual gathering of central bankers and economists hosted by the Kansas City Fed sometimes veered into current monetary policy issues (most notably in 2010 when then-chair of the Federal Reserve, Ben Bernanke, signalled a pivot from using unconventional monetary tools to normalise malfunctioning financial markets to also taking virtually sole responsibility for delivering better macroeconomic outcomes). Many were hoping that this year’s Jackson Hole symposium would provide insights on important policy issues now facing systemically-important central banks. Instead, both headline speakers — Fed Chair Janet Yellen and ECB President Mario Draghi — avoided them, opting to tell politicians about the importance of financial regulation and free trade.

This was not for an absence of content or timeliness, nor was it for lack of relevance to “Fostering a Dynamic Global Economy”, the theme of this year’s symposium. Wrapped in unusual uncertainties, these two central banks face delicate policy trade-offs of direct relevance to growth and financial stability. Instead, both leaders were looking to, and succeeded in maintaining policy optionality, albeit for different reasons. With that, markets will have to wait for clarity on policy issues that have a material impact on both the fundamental — and technical — underpinnings of asset prices.

Many had hoped that Chair Yellen would shed light on how the Fed intends to handle the competing claims on monetary policy from persistently low inflation and what the staff has judged to be “elevated” asset prices. There were hopes that President Draghi would detail the ECB’s approach to gradually tapering its large-scale purchases of market securities, including calibrating and sequencing this with steps to restore policy interest rates back to positive levels while navigating the stronger euro currency. The real optimists had also wondered whether, with Governor Haruhiko Kuroda of the Bank of Japan also at the gathering, there could even be signals on whether, and how, more than one systemically-important central bank could simultaneously normalise monetary policy in an orderly fashion.

Every one of these hopes was dashed. Rather than comment on monetary policy, Chair Yellen chose to defend the progress made in recent years on financial regulation and warned about the dangers of excessive de-regulation. President Draghi also steered clear of immediate policy issues, and this notwithstanding the additional pressures associated with the recent strengthening of the single currency. Instead, he opted to defend free trade, stressing the importance of making it more inclusive, and reinforced Chair Yellen’s emphasis on the importance of prudential financial regulation and international standards.

Chair Yellen and President Draghi had good reasons to disappoint the many eager for policy insights. The Fed is well embarked on a “beautiful normalisation” (borrowing a concept used a few years ago in a different context by Ray Dalio, the founder of hedge fund Bridgewater). Without derailing growth or destabilising markets, it halted QE, raised rates three times, and signalled its intention to contract its balance sheet. Facing a range of opinions on the ECB’s governing council, Draghi had little to gain (and lots to lose) from pre-empting the September policy meeting. And, when it comes to global feedback loops, neither they nor Governor Kuroda are in a position as yet to opine with sufficient authority on the prospects for simultaneous normalisation, especially given uncertainties about productivity, wage formation and the political enabling environment for the much-needed policy transition away from excessive reliance on central banks.

Last week’s symposium left lots of open questions for markets that, given very profitable adaptive expectations, are now deeply conditioned to rely on central banks to boost asset prices, repress financial volatility, and influence asset class correlations in a manner that rewards investors and traders even more. This won’t matter in the short-run as central banks are likely to continue to err on the side of dovish patience in what will be remembered as the loosest tightening cycle in modern history. Over the longer-term, however, it heightens the risk of possible collateral damage to the economy from artificially elevated asset prices, particularly if political conditions continue to delay much-needed pro-growth measures.

Mohamed El-Erian is chief economic adviser to Allianz and author of the book ‘The Only Game in Town’