Central banks are facing tougher economic conditions than they have experienced in decades and will find it harder to eradicate high inflation, senior officials at international organizations and monetary policymakers have warned. There is
The world’s major economic officials sounded alarm bells this weekend about their ability to counter the Federal Reserve, European Central Bank and other central banks as they battle the worst inflation in decades. rice field. Speaking at the annual meeting of central bankers in Jackson Hole, Wyoming, many said the global economy was entering a new difficult era.
“For at least the next five years, monetary policy decisions will be much more difficult than they were in the 20 years before the pandemic,” IMF Deputy Managing Director Gita Gopinath told the Financial Times.
“We are in an environment where supply shocks are more volatile than ever, which will create more costly trade-offs for monetary policy,” she said.
The pace of price increases surged as supply chain disruptions from Covid-19 lockdowns collided with high consumer demand fueled by unprecedented financial and monetary support since the start of the pandemic.Russia Ukraine triggered a series of commodity shocks, further causing supply constraints and higher prices.
These dynamics have forced central banks to tighten monetary policy aggressively to prevent inflation from becoming more deeply rooted in the global economy. But given the limited capacity to deal with supply-related problems, many fear that restoring price stability will inflict far more economic pain than in the past. I’m here.
World Bank President David Malpass has warned that central bank tools are ill-suited to address the supply-related inflationary pressures that have caused a significant portion of the recent inflation surge, especially in advanced economies.
“I think that’s the biggest challenge they face because rate hikes have to compete with a lot of frictions within the economy,” he said. It’s being counteracted by a lot of friction within the supply chain and production cycle.”
Key figures in the Federal Reserve and ECB have made “unconditional” commitments to restore price stability. Fed Chairman Jay Powell warned on Friday that a “persistent period” of low growth and a weak labor market would likely result.
Gopinath warned that the ECB faces a particularly severe trade-off. Given the severity of the energy crisis caused by the Ukraine war, there is a “real risk” of a stagflationary environment of low growth and high inflation emerging in Europe, she said.
Developing economies are also particularly vulnerable amid tightening global financial conditions, Malpass said.
“Part of it is rising interest rates, and they have outstanding debt, which increases debt service costs, but also makes it harder to get new debt,” he said. An additional challenge is that developed countries rely heavily on global capital and energy resources and lack working capital for new investments. [elsewhere]”
The enormity of the economic challenge facing central bankers was summed up by Bank of Korea Governor Changyong Lee when he said it was “a billion-dollar question” whether the world would return to a low-inflation environment. did.
What cut through the lively atmosphere among Jackson Hole attendees was the two-year wait to mingle face-to-face and exchange ideas because of the pandemic.
A sharp shift in economic dynamics forced attendees to explore themselves. “The room is full of humility [about] What we know and what we don’t know,” Gopinath said.
This event revealed in great detail the fault lines caused by the pandemic and the Russian invasion of Ukraine.
“We have energy crises, food crises, supply chain crises, and war, all of which have profound implications for global economic performance, the interconnected nature of the world, and most importantly. It’s important because of the relative prices of so many things,” said Jacob Frenkel, former governor of the Bank of Israel and chair of the Board of Directors of Group 30, an independent consortium of former policymakers. I’m here.
Complicating matters is the question of how much policy tightening is needed in the face of unpredictable fluctuations in supply and thus prices.
“We now have to make decisions against a backdrop of high uncertainty,” said Swiss National Bank President Thomas Jordan. Inflationary pressures are difficult to distinguish.”
According to ECB’s Schnabel, the next few years pose a risk known as ‘great volatility’. This contrasts with the past two decades, which economists have dubbed the “Great Moderation” due to its relatively benign dynamics.
Many officials have come to believe that the structural forces that had restrained upward pressure on prices, primarily globalization and the abundant supply of labor, had reversed.
“The global economy appears to be on the brink of a historic change as the aggregate supply tailwinds that have kept inflation in check are likely to turn into headwinds,” said Agustín Carstens, general manager of the Bank for International Settlements. “If so, the recent rise in inflationary pressures may prove to be more sustained.”
Skeptics of this view say the world’s major central banks are confident they can avoid entrenched high inflation.
Adam Posen, director of the Peterson Institute for International Economics, said: “The issue for central banks to focus on is not establishing inflation credibility.” “The problem is redoing strategy and inflation targeting for a world with more frequent and larger negative supply shocks.”
The 2% inflation target, to which advanced-market central banks have largely adhered to for decades, has been repeatedly raised throughout the conference, and economists may need to adapt it to fit a more fragmented global economy. He suggested that he could not.
Long before inflation spiked, the Fed announced in 2020 that it would set a long-term average inflation target of 2% to make up for past periods of underperformance. Last year, the ECB said he would allow inflation to exceed 2% temporarily.
“If the economy can slow down to 2%, reduce the amount of slow growth needed, and move to a better regime in the long run, it seems to me that it will be less constrained by the zero lower bound. It’s a win-win,” said former IMF chief economist Maurice Obstfeld in an interview.
Many economists have put forward a 3% inflation target. Former Fed official Stephanie Aaronson, now at the Brookings Institution, said central banks could look beyond supply shocks and have more flexibility to support the economy during a downturn. That’s it.
How and when central banks, such as the Fed and other central banks, engage in changing mandates depends on the risk that inflation will be poorly managed and households’ and businesses’ expectations of future price increases will become entrenched. Considering that it is very important.
Harvard economics professor Karen Dynan, who previously worked at the US central bank, said it was “extremely dangerous” to bring up the topic until the Fed and its counterparts brought inflation under control.
“They need to do everything they can to maintain and possibly restore trust, but they have to think hard about what that new goal should be.”